UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended                             Commission File Number
     December 31, 1998                                         1-12875

                      CORNERSTONE REALTY INCOME TRUST, INC.

             (Exact name of registrant as specified in its charter)

            VIRGINIA                                        54-1589139
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                     Identification Number)

       306 EAST MAIN STREET
           RICHMOND, VA                                         23219
(Address of principal executive offices)                      (Zip Code)


                                 (804) 643-1761
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

  TITLE OF EACH CLASS                     NAME OF EACH EXCHANGE ON WHICH
  -------------------                     ------------------------------
                                                       REGISTERED:          
                                                       -----------

Common shares, no par value                      New York Stock Exchange



           Securities registered pursuant to Section 12(g) of the Act:

                           Common shares, no par value

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
     required to be filed by Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     registrant was required to file such reports),  and (2) has been subject to
     such filing requirements for the past 90 days. Yes X  No
                                                       ---    ---
     Based on the closing sales price of March 18, 1999,  the  aggregate  market
     value of the voting common equity held by  non-affiliates of the registrant
     on such date was $372,628,385.*

     On March 18, 1999, there were outstanding  approximately  39,370,148 common
     shares.

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
     405 of Regulation S-K is not contained  herein,  and will not be contained,
     to the best of registrant's  knowledge,  in definitive proxy or information
     statements  incorporated  by reference in Part III of this Form 10-K or any
     amendment to this Form 10-K. Yes X    No
                                     ---       ---

     *In  determining  this  figure,  the Company  has  assumed  that all of its
     officers and  directors,  and persons known to the Company to be beneficial
     owners of more than 5% of the Company's common shares, are affiliates. Such
     assumptions should not be deemed conclusive for any other purpose.

<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

     The portions of the  registrant's  current report on Form 8-K dated January
     15, 1998 referred to in Part I.

     The portions of the registrant's current report on Form 8-K dated March 31,
     1998 referred to in Part I.

     The portions of the registrant's  current report on Form 8-K dated June 14,
     1998 referred to in Part I.

     The portions of the  registrant's  current report on Form 8-K dated July 2,
     1998 referred to in Part I.

     The portions of the  registrant's  current  report on Form 8-K dated August
     12, 1998 referred to in Part I.

     The portions of the  registrant's  current report on Form 8-K dated October
     16, 1998 referred to in Part I.



                                     PART I


     INTRODUCTION


          This Annual  Report  contains  forward-looking  statements  within the
     meaning of Section  27A of the  Securities  Act of 1993,  as  amended,  and
     Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.  Such
     forward-looking   statements  include,   without   limitation,   statements
     concerning  anticipated  lower  expenses from the  Company's  conversion to
     self-administration,  anticipated improvements in financial operations from
     completed and planned property renovations,  and expected benefits from the
     Company's  ownership  of stock in,  providing  fees for  services to, Apple
     Residential  Income Trust, Inc. (Apple).  Such statements involve known and
     unknown risks,  uncertainties  and other factors which may cause the actual
     results,  performance  or  achievement  of  the  Company  to be  materially
     different  from the results of operations or plans  expressed or implied by
     such forward-looking  statements. Such factors include, among other things,
     unanticipated  adverse  business  developments  affecting the Company,  the
     properties or Apple, as the case may be, adverse changes in the real estate
     markets and general and local economies and business  conditions,  and year
     2000 compliance issues.  Although the Company believes that the assumptions
     underlying the forward-looking  statements contained herein are reasonable,
     any of the assumptions  could be inaccurate,  and therefore there can be no
     assurance that such statements included in this annual report will prove to
     be  accurate.  In light of the  significant  uncertainties  inherent in the
     forward-looking   statements   included  herein,   the  inclusion  of  such
     information  should not be regarded as a  representation  by the Company or
     any  other  person  that  the  results  or  conditions  described  in  such
     statements or the objectives and plans of the Company will be achieved.  In
     addition, the Company's continued qualification as a real estate investment
     trust ("REIT")  involves the  application  of highly  technical and complex
     provisions of the Internal  Revenue Code.  Readers should  carefully review
     the Company's  financial  statements and the notes thereto,  as well as the
     risk factors  described in the Company's  filings with the  Securities  and
     Exchange Commission.


     Item 1.  Business

     Cornerstone  Realty Income Trust,  Inc.  (together  with its  subsidiaries,
     Cornerstone REIT, Limited Partnership,  Apple Residential  Advisors,  Inc.,
     Apple Residential Management Group, Inc., and CRIT-NC, LLC, the "Company"),
     a  Virginia   corporation,   was  incorporated  in  August  1989.   Initial
     capitalization  occurred on August 18, 1992.  Operations of rental property
     commenced  on June 1, 1993.  The  business of the Company is to acquire and
     operate   existing   residential   apartment   complexes   located  in  the
     mid-Atlantic and southeastern  United States. The Company owned fifty-eight
     properties  comprising  13,462  apartment  units  within  that region as of
     December 31, 1998.  The Company's  property  acquisitions  are described in
     Item 2 of this report,  which is hereby  incorporated  herein by reference.
     Currently,  Cornerstone  Realty Income Trust, Inc. owns directly all of its
     properties other than those in North Carolina,  and those in North Carolina
     are owned by CRIT-NC,  LLC, a Virginia limited  liability company organized
     in December 1997 that is wholly-owned  by Cornerstone  Realty Income Trust,
     Inc. The Company formed Cornerstone REIT, LP to acquire properties allowing
     a structure that allows the Company to issue operating  partnership  units.
     As of December  31,  1998,  Cornerstone  Realty  Income  Trust,  Inc.  owns
     1,403,445 operating units representing an 88% interest in Cornerstone REIT,
     LP.

     The Company, a self-administered and self-managed equity REIT headquartered
     in Richmond,  Virginia, is a fully integrated real estate organization with
     expertise  in the  management,  acquisition  and  renovation  of  apartment
     communities.  The Company  maintains an intense focus on the  operations of
     its properties to generate  consistent,  sustained  growth in net operating
     income  ("NOI"),  which  it  believes  is the  key to  growing  funds  from
     operations per common share. The Company believes that successful



                                       2
<PAGE>

     implementation  of this  strategy will allow it to continue to increase its
     NOI from its apartment portfolio.  Through renovation and enhanced property
     management of the apartment  communities,  the Company  strives to increase
     cash flows, thereby adding value to the underlying real estate.

     The Company's  objective is to increase  distributable cash flow and common
     share value by:

     -    Increasing  rental rates,  maintaining high economic  occupancy rates,
          and controlling costs at the properties; and

     -    Acquiring additional  properties at attractive prices that provide the
          opportunity to improve operating  performance  through the application
          of the Company's management, marketing, and renovation programs.

     The Company has seven  regional  property  management  offices,  located in
     Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington,
     North Carolina; Columbia, South Carolina; and Atlanta, Georgia. The Company
     currently  has  approximately  475  employees,   including  specialists  in
     acquisition,  management,  marketing, leasing, development,  accounting and
     information  systems.  The Company's  executive  officers have  substantial
     experience  with  apartment  properties,  having been  responsible  for the
     management,  acquisition and renovation of more than 20,000 apartment units
     over the last 24 years using the strategies and techniques described below.
     The Company's top three executive officers have an average of approximately
     16 years each in the management,  acquisition and renovation of residential
     apartment communities.

     History

     The Company  began  operations in 1993 to continue and expand the apartment
     community  acquisition,  renovation and  management  strategies of Glade M.
     Knight,  the Company's  Chairman,  Chief  Executive  Officer and President.
     During his  career,  Mr.  Knight has been  involved  in the  ownership  and
     management  of  over  20,000  apartment   units,   mainly  located  in  the
     mid-Atlantic region of the United States. Senior management of the Company,
     which consists of Mr. Knight,  Debra A. Jones, Chief Operating Officer, and
     Stanley J. Olander,  Jr., Chief Financial Officer, has worked together,  in
     the same  business  as the  Company,  for more  than 16  years.  Management
     believes that its long-term operating  experience is invaluable in enabling
     the Company to operate its properties  efficiently  and to identify and act
     upon acquisition opportunities.

     Growth through Management and Leasing


     The Company seeks to increase net operating  income through active property
     management,  which includes keeping rental rates at or above market levels,
     maintaining high economic  occupancy through tenant  retention,  creating a
     property identity and effectively marketing each property,  and controlling
     operating expenses at the property level.

     Management develops the overall management and leasing strategy,  including
     goals and budgets,  for each property.  In order to achieve each property's
     objectives, management delegates significant decision-making responsibility
     to regional and on-site  employees,  thereby  instilling in its employees a
     sense of  ownership  of  their  property.  Management  believes  that  this
     strategy is an effective  way to maximize  each  property's  potential.  In
     order to achieve desired results,  the Company emphasizes  training for its
     on-site employees as well as raising rents to be at or above the market for
     comparable properties.  The Company also ties on-site employees' bonuses to
     both  net  operating  income  targets   established  for  their  respective
     properties and the Company's overall financial performance.

     Management  believes that tenant  retention is critical to  generating  net
     operating income growth.  Tenant retention  maintains or increases economic
     occupancy and minimizes the costs associated with preparing  apartments for
     new  occupants.  The Company  employs one person at each property who has a
     primary  focus on  tenant  retention.  The  tenant  retention  specialist's
     objective is to make tenants feel at home in the community through personal
     attention,  which includes  organizing  social  functions and activities as
     well as  responding  promptly  to any  tenant  problems  that may  arise in
     conjunction with the apartment or community. The Company's philosophy is to
     market its properties continually to existing tenants in order to achieve a
     low turnover  rate.  The Company  believes  that the  turnover  rate of its
     properties  is below the average  turnover  rate for  comparable  apartment
     communities.

     The  Company  seeks to  create  a unique  identity  for  each  property  by
     emphasizing curb appeal,  signage,  and attractive  common area facilities,
     such as  clubhouses  and  swimming  pools.  The  Company  has  upgraded  or
     renovated many of the properties' common area facilities after acquisition.
     Each property is marketed as a "Cornerstone Community" but typically has an
     individual  property  name  tied  to a local  theme.  Each  property  has a
     dedicated on-site marketing person whose  responsibility is to position and
     market the property within the local  community  through such activities as
     media advertising,  on-site  promotional events and personal calls to local
     businesses.


                                       3
<PAGE>

     Operating  expenses are  controlled at each property by setting  budgets at
     the  corporate  level  and  requiring  that any  expense  over  budget at a
     property be approved by management.  Purchase  discounts are sought at both
     the  corporate  level and  locally in those  areas  where the Company has a
     significant  presence.  All  contracts  for goods and  services  are re-bid
     annually  to ensure  competitive  pricing.  The  Company  has a  preventive
     maintenance  program  and  the  ability  to  perform  work  using  in-house
     personnel,  which helps the Company to reduce  expenses at the  properties.
     For  example,  the  maintenance  manager at each  property is  qualified to
     perform HVAC and plumbing work which otherwise would be contracted  outside
     the Company.

     Growth through Acquisitions, Renovations and Expansion


     The  Company  seeks to  generate  growth in net  operating  income  through
     acquisitions  by:  (i)  acquiring  under-performing  assets  at  less  than
     replacement  cost;  (ii)  correcting  operational  problems;  (iii)  making
     selected  renovations;  (iv)  increasing  economic  occupancy;  (v) raising
     rental rates; (vi) implementing cost controls; and (vii) providing enhanced
     property  and  centralized  management.  In  markets  that it  targets  for
     acquisition opportunities, the Company attempts to gain a significant local
     presence  in  order  to  achieve  operating   efficiencies.   In  analyzing
     acquisition  opportunities,  the Company considers acquisitions of property
     portfolios as well as individual properties.

     The Company has demonstrated an ability to grow through  acquisitions.  The
     Company's  first two properties  were acquired in June of 1993. At December
     31, 1998, the Company owned and operated 58 apartment communities.

     The  Company  analyzes  specific  criteria  in  connection  with a proposed
     acquisition.  These criteria include: (i) the market in which a property is
     located and whether it has a diversified  economy,  stable  employment base
     and increasing  average household income;  (ii) the property's  current and
     projected cash flow and the ability to increase net operating income; (iii)
     the  condition  and design of the  property  and whether the  property  can
     benefit from  renovations;  (iv) historical and projected  occupancy rates;
     (v)  geographic   location  in  light  of  the  Company's   diversification
     objectives;  and (vi) the  purchase  price of the property as it relates to
     the cost of new construction.

     The Company believes it has been and will be able to purchase properties at
     less than replacement cost because of the presence of deferred maintenance,
     management neglect, or prior owner's financial distress.  Upon acquisition,
     the Company seeks to improve both operating  results and property  identity
     through a 24-month  renovation policy which includes selective  renovations
     such as new  roofs,  new  exterior  siding,  exterior  painting,  clubhouse
     renovation and construction,  and interior  refurbishment.  The Company has
     invested in  renovations  to its  properties  approximately  $26 million in
     1998,  $23  million  in 1997,  approximately  $19.0  million  in 1996,  and
     approximately  $7.1 million in 1995. To date,  these actions have permitted
     the Company to increase rental rates and improve  economic  occupancy rates
     at the properties.

     Because  the  Company  has  grown  and  plans  to  grow  through   property
     acquisitions, management has created a system establishing "Takeover Teams"
     to provide  immediate  transitional  management  and  leasing  services  to
     newly-acquired   properties   and  to  implement   quickly  the   Company's
     operational  programs  and  policies.  A Takeover  Team  consists of senior
     property  management   personnel  as  well  as  marketing  and  maintenance
     specialists from other communities owned by the Company.  The Takeover Team
     remains at a property until the Company's  management and leasing  programs
     have  been  installed  and  the new  on-site  team  is  fully  operational.
     Typically, this process takes two to four weeks to complete.

     The  Company has also made,  and may in the future  make,  acquisitions  of
     established apartment communities involved in foreclosure  proceedings.  In
     this situation,  the Company seeks  properties that have below  market-rate
     leases,  correctable vacancy problems or inefficient  property  management.
     The Company also may make  acquisitions of properties  from  over-leveraged
     owners  of  properties,   governmental  regulatory   authorities,   lending
     institutions    that   have    taken    control    of   such    properties,
     mortgagees-in-possession  and, possibly,  through bankruptcy reorganization
     proceedings.

     If sufficient  tenant  demand  exists and suitable  land is available,  the
     Company  may  construct  additional  apartment  units on land  adjacent  to
     certain  properties.  The Company  believes that its successful  experience
     with  large-scale  property  renovation  will  also  permit  strategic  and
     cost-effective  property  expansion.  It is the Company's policy to acquire
     such additional  apartment  units on a "turn-key"  basis from a third party
     contractor,   thereby   minimizing  the  risks  normally   associated  with
     development and lease-up.

     Currently,  the Company has planned  expansion  projects  for two  existing
     properties:  Glen  Eagles  and  The  Meadows.  Glen  Eagles  is a  166-unit
     apartment  community  located in  Winston-Salem,  North Carolina.  The land
     adjacent to the community  will  accommodate  approximately  220 additional
     apartment units which can be served by existing amenities.  At The Meadows,
     a 176-unit community in Asheville, North Carolina, there is additional land
     for  approximately 250 additional  apartment units. The Company  outsources
     its development to third party  developers who build and initially  operate
     the  property.  The Company is only  required to  purchase  such  developed
     property if certain  rental rate and occupancy  results are  achieved.  The
     Company does not fund any  development  activities for the  developer.  The
     developer has completed the clubhouse and the first  building will be ready
     for occupancy at the end of February. The Company anticipates  construction
     and lease-up to be completed in the fourth



                                       4
<PAGE>

     quarter of 1999.  The Company does not have  interests in any land adjacent
     to any other  properties  it now owns,  but may acquire  land or options to
     acquire land of this type  adjacent to other  properties  it may acquire in
     the future.

     Financing Policy

     The Company's objective is to seek capital as needed at the lowest possible
     cost.  In addition to obtaining  capital from future sales of common shares
     (or preferred shares, if authorized in the future),  the Company may obtain
     lines of credit or other  unsecured  borrowings.  The  Company  is also not
     precluded from engaging in secured borrowings,  although its current policy
     is to hold its  properties on an unmortgaged  basis,  and as of December 31
     1998 it had no secured debt. The Company may also seek  eventually to issue
     investment-grade debt, although there is no assurance that this will occur.

     During 1998,  the Company  raised $30 million by issuing 2.6 million common
     shares through its participation in a Unit Investment Trust, which resulted
     in $28.1 million net proceeds to the Company, after underwriting discounts,
     commissions  and other direct  costs.  The Company used the proceeds to pay
     down its line of credit, to acquire of additional apartment communities and
     for working capital.

     The  Company  uses an  unsecured  line of credit for interim  financing  to
     assist in property acquisitions. Historically, the Company has drawn on its
     unsecured  lines  of  credit  to  accomplish  in a timely  manner  property
     acquisitions deemed desirable by management,  and has thereafter  curtailed
     the  outstanding  balances on the lines of credit  with  proceeds of future
     offerings. The Company currently expects to continue to use this strategy.

     During  October  1998,  the Company  closed a $25 million  extension on the
     Unsecured Line of Credit,  bringing the maximum permitted borrowing to $200
     million.  The lenders are a  syndicate  of banks with First Union  National
     Bank as agent.  The Unsecured Line of Credit currently bears interest equal
     to one-month  LIBOR plus 1.35%.  The interest rate is adjusted  monthly and
     the formula for  determination  of the  interest  rate can change  based on
     changes in financial condition and debt level of the Company.

     The $25 million  extension on the Unsecured  Line of Credit is due on April
     15, 1999 and the remaining  balance is due on October 30, 2000. On December
     31, 1998, the outstanding  balance on the Unsecured Line of Credit was $196
     million.  In  negotiating  and closing the  Unsecured  Line of Credit,  the
     Company was able to increase the amount of and reduce the interest  rate on
     its prior unsecured  borrowings.  The Company is currently negotiating with
     its  lenders to extend the  maturities  of these  obligations.  The Company
     currently  is  seeking  alternatives  to reduce  its  interest  cost and is
     considering  replacing a portion of the amounts  outstanding under its line
     of credit with fixed rate longer maturity debt.

     The Company has also obtained from First Union  National Bank of Virginia a
     $5 million  unsecured line of credit for general corporate  purposes.  This
     line of credit bears interest at LIBOR plus 1.60%, adjusted monthly, and is
     due on March 31, 1999.  On December 31, 1998,  the  outstanding  balance on
     this loan was approximately $343,000.

     The  Company  intends to  maintain a debt  policy  (the "Debt  Limitation")
     limiting the Company's total combined  indebtedness plus its pro rata share
     of indebtedness of any unconsolidated investments ("Joint Venture Debt") to
     40% of the Company's total equity market  capitalization  plus its combined
     indebtedness (including its pro rata share of Joint Venture Debt).

     Apple Residential Income Trust

     In August 1996, Mr. Knight organized Apple  Residential  Income Trust, Inc.
     ("Apple")  for the purpose of  acquiring  apartment  communities  in Texas.
     Apple has elected to be taxed as a REIT.  The Company will  participate  in
     Apple's  growth  through  its direct or  indirect  receipt of  acquisition,
     disposition, management and advisory fees, ownership of Apple common shares
     and possible future  acquisition of Apple.  As of December 31, 1998,  Apple
     had raised gross proceeds of $281,228,183 in an ongoing best-efforts equity
     offering and had acquired 26 properties in the Dallas, Texas area since its
     inception.

     The  Company  has a  continuing  right to acquire and own up to 9.8% of the
     common  shares of Apple.  The  purchase  price under the option  equals the
     public offering price for the common shares of Apple (currently  $10.00 per
     common share) less the related  selling  commissions  (currently  $1.00 per
     common  share).  As of December 31, 1998,  the Company owned 417,778 common
     shares of Apple, representing approximately 1.5% of the total common shares
     of Apple outstanding as of that date.

     The Company also has a right of first  refusal to purchase  the  properties
     and business of Apple. The Company and Apple have hired financial  advisors
     to evaluate a potential  merger.  In  addition,  the Company and Apple have
     appointed independent  committees of the board of directors to evaluate the
     potential merger.


                                       5
<PAGE>

     The Company or its affiliates  provides advisory,  property  management and
     real estate  brokerage  services to Apple in exchange  for fees and expense
     reimbursements  under a contract  with Apple.  The Company  owns all of the
     nonvoting  preferred  shares of its affiliates,  which entitle it to 95% of
     the economic benefits of such corporations.

     Environmental Matters

     In connection with each of its property acquisitions, the Company obtains a
     Phase I Environment Report, and such additional  environmental  reports and
     surveys  as are  necessitated  by such  preliminary  report.  Based on such
     reports, the Company is not aware of any environmental situations requiring
     remediation  at its  properties  which  have not been or are not  currently
     being remediated as necessary.  No material  remediation  costs have or are
     expected to occur.

     Property Acquisitions in 1998

     The  following  is a summary  of the 7  property  acquisitions  made by the
     Company during 1998.

     On January 15, 1998, the Company purchased Sterling Point Apartments (which
     was  subsequently  renamed "Stone  Point"),  in Charlotte,  North Carolina.
     Information with respect to this property is hereby  incorporated herein by
     reference from pages 3 through 7 of the Company's  Report on Form 8-K dated
     January 15, 1998.

     On March 31,  1998,  the Company  acquired  Hampton  Pointe  Apartments  in
     Charleston,  South Carolina.  Information  with respect to this property is
     hereby  incorporated  herein  by  reference  from  pages 4 through 7 of the
     Company's Report on Form 8-K dated March 31, 1998.

     On April 1, 1998, the Company acquired Edgewood Knoll Apartments (which was
     subsequently  renamed  "Pinnacle  Ridge")  in  Asheville,  North  Carolina.
     Information with respect to these properties is hereby  incorporated herein
     by reference  from pages 8 through 11 of the  Company's  Report on Form 8-K
     dated March 31, 1998.

     On June 4, 1998,  the Company  acquired The Timbers  Apartments in Raleigh,
     North  Carolina.  Information  with respect to these  properties  is hereby
     incorporated  herein by reference  from pages 3 through 6 of the  Company's
     Report on Form 8-K dated June 4, 1998.

     On July 2, 1998, the Company acquired The Gables  Apartments,  in Richmond,
     Virginia.  Information with respect to this property is hereby incorporated
     herein by reference from pages 3 through 6 of the Company's  Report on Form
     8-K dated July 2, 1998.

     On August 12, 1998, the Company  acquired Spring Lake Apartments in Morrow,
     Georgia.  Information with respect to this property is hereby  incorporated
     herein by reference from pages 4 through 8 of the Company's  Report on Form
     8-K dated August 12, 1998.

     On October 16, 1998, the Company acquired Cape Landing Apartments in Myrtle
     Beach,  South  Carolina.  Information  with respect to these  properties is
     hereby  incorporated  herein  by  reference  from  pages 4 through 8 of the
     Company's Report on Form 8-K dated October 16, 1998.

     Recent Developments

     The  Company's  Board of  Directors  met on March  30,  1999,  and voted to
     approve a merger with Apple  Residential  Income  Trust,  Inc.  subject to,
     among  other   requirements,   an   affirmative   vote  of  the   Company's
     shareholders.

     Item 2. Properties

     PROPERTY DESCRIPTIONS AND CHARACTERISTICS

          As of December 31, 1998,  the Company  owned 58 apartment  communities
     comprising  13,462  apartment  units.  The  properties are located in North
     Carolina (31  communities),  Virginia (12  communities),  South Carolina (8
     communities) and Georgia (7 communities).


                                       6

<PAGE>
  The following table sets forth specific information regarding the properties:
<TABLE>
<CAPTION>
                                                                                  Initial           Total
                                                  Year           Date of         Acquisition    Investment at    Number       
           Property            Location        Completed       Acquisition          Cost         12-31-98(1)    of Units      
           --------            --------        ---------       -----------          ----         -----------    --------      
<S>                            <C>              <C>             <C>              <C>            <C>             <C>           
GEORGIA
-------
 Ashley Run................     Atlanta            1987         April 1997         $18,000,000    $19,482,278     348         
 Stone Brook...............     Atlanta            1986         October 1997         7,850,000      8,711,137     188         
 Carlyle Club..............     Atlanta            1974         April 1997          11,580,000     12,854,800     243         
 Dunwoody Springs..........     Atlanta            1981         July 1997           15,200,000     18,224,312     350         
 Savannah West.............     Augusta            1968         July 1996            9,843,620     13,289,356     456         
 West Eagle Greens.........     Augusta            1974         March 1996           4,020,000      6,344,127     165         
 Spring Lake                    Morrow             1986         August 1998          9,000,000      9,363,025     188         
                                                                                                                              
NORTH CAROLINA
--------------
 The Meadows...............     Asheville          1974         January 1996         6,200,000      7,442,434     176         
 Beacon Hill...............     Charlotte          1985         May 1996            13,579,203     14,695,613     349         
 Bridgetown Bay............     Charlotte          1986         April 1996           5,025,000      5,845,929     120         
 Charleston Place..........     Charlotte          1986         May 1997             9,475,000     10,210,482     214         
 Hanover Landing...........     Charlotte          1972         August 1995          5,725,000      7,449,266     192         
 Heatherwood ..............     Charlotte          (3)          (3)                 17,630,457     23,397,697     476         
 Meadow Creek..............     Charlotte          1984         May 1996            11,100,000     12,504,352     250         
 Paces Glen................     Charlotte          1986         July 1996            7,425,000      8,129,400     172         
 Sailboat Bay..............     Charlotte          1973         November 1995        9,100,000     13,464,303     358         
 Summerwalk................     Concord            1983         May 1996             5,660,000      7,538,671     160         
 Deerfield.................     Durham             1985         November 1996       10,675,000     11,218,179     204         
 The Landing...............     Durham             1984         May 1996             8,345,000     10,055,764     200         
 Parkside at Woodlake......     Durham             1996         September 1996      14,663,886     15,119,409     266         
 Wind Lake.................     Greensboro         1985         April 1995           8,760,000     11,085,542     299         
 Signature Place...........     Greenville         1981         August 1996          5,462,948      7,258,310     171         
 Highland Hills............     Raleigh            1987         September 1996      12,100,000     14,421,444     264         
 Clarion Crossing..........     Raleigh            1972         September 1997      10,600,000     11,076,591     228         
 The Hollows...............     Raleigh            1974         June 1993            4,200,000      6,173,553     176         
 Paces Arbor...............     Raleigh            1986         March 1997           5,588,219      5,970,315     101         
 Paces Forest..............     Raleigh            1986         March 1997           6,473,481      6,958,627     117         
 Remington Place...........     Raleigh            1985         October 1997         7,900,000      8,457,508     136         
 St. Regis.................     Raleigh            1986         October 1997         9,800,000     10,135,730     180         
 The Trestles..............     Raleigh            1987         December 1994       10,350,000     11,498,537     280         
 The Timbers ..............     Raleigh            1983         June 1998            8,100,000      8,352,596     176         
 Chase Mooring.............     Wilmington         1968         August 1994          3,594,000      5,764,709     224         
 Osprey Landing............     Wilmington         1974         November 1995        4,375,000      7,248,041     176         
 Wimbledon Chase...........     Wilmington         1976         February 1994        3,300,000      5,674,978     192         
 Glen Eagles...............     Winston Salem      1986         October 1995         7,300,000      9,033,017     166         
 Mill Creek................     Winston Salem      1984         September 1995       8,550,000      9,584,482     220         
         
                                                       
<CAPTION>
                                                                     December        Year-to-Date
                                          Total        Average        Average          Economic
                                       Investment     Unit Size    Rent Per Month(5)   Occupancy
                                       Per Unit at     (Square    -----------------   ---------   
           Property                     12-31-98        Feet)       1997(2) 1998     1997(2) 1998
           --------                     --------        -----       ------------     ------------
<S>                                    <C>            <C>         <C>    <C>       <C>     <C>
GEORGIA
-------
 Ashley Run................               $55,984     1150        $704     $743     91%      92%
 Stone Brook...............                46,336      937        633      656      84%      89%
 Carlyle Club..............                52,900     1089        705      730      87%      92%
 Dunwoody Springs..........                52,069      948        643      681      91%      92%
 Savannah West.............                29,143      877        470      473      84%      83%
 West Eagle Greens.........                38,449      796        455      485      84%      90%
 Spring Lake                               49,803     1009         --      646       --      94%
                                       
NORTH CAROLINA
--------------
 The Meadows...............                42,287     1068        601      620      96%      95%
 Beacon Hill...............                42,108      734        552      587      92%      94%
 Bridgetown Bay............                48,716      867        602      631      94%      95%
 Charleston Place..........                47,713      806        585      613      93%      93%
 Hanover Landing...........                38,798      832        513      545      93%      94%
 Heatherwood ..............                49,155     1186        578      609      91%      90%
 Meadow Creek..............                50,017      860        476      620      93%      91%
 Paces Glen................                47,264      907        626      640      93%      93%
 Sailboat Bay..............                37,610      906        550      569      86%      91%
 Summerwalk................                47,117      963        575      626      95%      94%
 Deerfield.................                54,991      888        751      754      93%      92%
 The Landing...............                50,279      960        748      650      97%      93%
 Parkside at Woodlake......                56,840      865        694      686      89%      88%
 Wind Lake.................                37,075      727        490      506      88%      92%
 Signature Place...........                42,446     1037        497      533      94%      94%
 Highland Hills............                54,627     1000        718      767      97%      96%
 Clarion Crossing..........                48,582      769        603      637      93%      93%
 The Hollows...............                35,077      903        630      655      93%      92%
 Paces Arbor...............                59,112      899        658      672      92%      89%
 Paces Forest..............                59,475      883        656      665      93%      89%
 Remington Place...........                62,188     1098        741      758      96%      92%
 St. Regis.................                56,310      840        658      686      93%      93%
 The Trestles..............                41,066      776        582      589      91%      92%
 The Timbers...............                47,458      745         --      614       --      92%
 Chase Mooring.............                25,735      867        513      559      88%      79%
 Osprey Landing............                41,182      981        591      629      91%      88%
 Wimbledon Chase...........                29,557      818        561      574      96%      92%
 Glen Eagles...............                54,416      952        650      683      94%      93%
 Mill Creek................                43,566      897        557      592      91%      94%
</TABLE>
                                       7

<PAGE>
<TABLE>
<CAPTION>
                                                                                                                              
                                                                                                                              
                                                                                    Initial        Total                      
                                                  Year           Date of         Acquisition    Investment at    Number       
           Property            Location        Completed       Acquisition           Cost        12-31-98(1)    of Units      
           --------            --------        ---------       -----------           ----        -----------    --------      
<S>                            <C>              <C>             <C>              <C>            <C>             <C>           

Stone Point                     Charlotte          1986         January 1998         9,700,000     10,176,529     192        
Pinnacle Ridge                  Asheville          1951         April 1998           5,731,150      6,048,013     168        

SOUTH CAROLINA
--------------

 Westchase.................     Charleston         1985         January 1997       $11,000,000     12,811,352     352        
 Hampton Pointe                 Charleston         1986         March 1998          12,225,000     14,273,203     304        
 The Arbors at Windsor
   Lake....................     Columbia           1991         January 1997        10,875,000     11,519,973     228        
 Stone Ridge...............     Columbia           1975         December 1993        3,325,000      5,814,292     191        
 Breckinridge..............     Greenville         1973         June 1995            5,600,000      7,062,749     236        
 Magnolia Run..............     Greenville         1972         June 1995            5,500,000      6,909,344     212        
 Polo Club.................     Greenville         1972         June 1993            4,300,000      7,505,936     365        
 Cape Landing                   Myrtle Beach       1998         October 1998        17,100,000     17,265,961     288        
                                                                                                                             

VIRGINIA
--------

 Trophy Chase..............     Charlottesville    1970         April 1996           3,710,000      6,729,365     185        
 Greenbrier................     Fredericksburg     1970/1990    October 1996        11,099,525     12,491,834     258        
 Tradewinds................     Hampton            1988         November 1995       10,200,000     11,078,865     284        
 County Green..............     Lynchburg          1976         December 1993        3,800,000      5,299,670     180        
 Ashley Park...............     Richmond           1988         March 1996          12,205,000     13,147,418     272        
 Hampton Glen..............     Richmond           1986         August 1996         11,599,931     12,746,609     232        
 Trolley Square............     Richmond           (4)          (4)                 10,242,575     13,262,283     325        
 Arbor Trace...............     Virginia Beach     1985         March 1996           5,000,000      6,022,029     148        
 Bay Watch Pointe..........     Virginia Beach     1972         July 1995            3,372,525      4,996,481     160        
 Harbour Club.............      Virginia Beach     1988         May 1994             5,250,000      6,246,147     214        
 Mayflower Seaside.........     Virginia Beach     1950         October 1993         7,634,144     10,191,359     263        
 The Gables                     Richmond           1987         July 1998           11,500,000     11,804,432     224        
                                                                                                                             

TOTAL/AVERAGE..............                                                       $497,520,664   $587,438,358    13,462      
                                                                                  ============   ============    ======
<CAPTION>

                                                                     December        Year-to-Date
                                          Total        Average        Average          Economic
                                       Investment     Unit Size    Rent Per Month(5)   Occupancy
                                       Per Unit at     (Square    -----------------   ---------   
           Property                     12-31-98        Feet)       1997(2) 1998     1997(2) 1998
           --------                     --------        -----       ------------     ------------
<S>                                    <C>            <C>         <C>    <C>       <C>     <C>

Stone Point                                53,003      848         --      631       --      94%
Pinnacle Ridge                             36,000      885         --      528       --      95%

SOUTH CAROLINA
--------------

 Westchase.................                36,396      706        521      551      95%      96%
 Hampton Pointe ...........                46,951     1035         --      606       --      98%
 The Arbors at Windsor
   Lake....................                50,526      966        626      668      91%      94%
 Stone Ridge...............                30,441     1047        506      542      91%      93%
 Breckinridge..............                29,927      726        436      441      90%      90%
 Magnolia Run..............                32,591      993        527      535      94%      91%
 Polo Club.................                20,564      807        406      403      87%      84%
 Cape Landing .............                59,951      933         --      654       --      84%

VIRGINIA
--------

 Trophy Chase..............                36,375      803        511      581      89%      94%
 Greenbrier................                48,418      851        611      648      94%      97%
 Tradewinds................                39,010      930        590      624      90%      92%
 County Green..............                29,443     1000        512      525      95%      94%
 Ashley Park...............                48,336      765        583      606      95%      95%
 Hampton Glen..............                54,942      788        669      677      96%      94%
 Trolley Square............                40,807      589        526      561      95%      95%
 Arbor Trace...............                40,689      850        563      590      95%      91%
 Bay Watch Pointe..........                31,228      911        590      620      93%      95%
 Harbour Club.............                 29,188      813        565      589      89%      91%
 Mayflower Seaside.........                38,750      698        681      715      95%      95%
 The Gables                                52,698      700         --      600       --      94%

TOTAL/AVERAGE..............               $43,637      888        $582     $608     92%      92%
                                          =======      ===        ====     ====     ===      ===
</TABLE>


     ---------------
          Notes to Table of Properties:

          (1)  "Total  Investment"   includes   the   purchase   price  of   the
               property  plus real  estate   commissions,   closing   costs  and
               improvements capitalized since the date of acquisition.

          (2)  An open item  denotes  that the Company did not own the  property
               during the period indicated.

          (3)  Heatherwood  Apartments is comprised of Heatherwood (completed in
               1980) and Italian Village and Villa Marina Apartments  (completed
               in  1980),   acquired  in   September   1996  and  August   1997,
               respectively,  at a cost of $10,205,457 and $7,425,000.  They are
               adjoining properties and are operated as one apartment community.

          (4)  Trolley  Square  Apartments  is comprised of Trolley  Square East
               Apartments (completed in 1964) and Trolley Square West Apartments
               (completed  in 1965)  acquired  in June 1996 and  December  1996,
               respectively,  at a cost of $6,000,000 and  $4,242,575.  They are
               adjacent properties and are operated as one apartment community.



                                       8
<PAGE>

          (5)  Average rent per month reflects December' monthly gross potential
               less concessions divided by the property's number of units

          (6)  Economic  occupancy  percentage  reflects Adjusted Scheduled Rent
               divided  by  Adjusted  Gross   Potential   where  Adjusted  Gross
               Potential  consists of Gross Potential net of concessions,  model
               unit costs, and employee unit costs, and Adjusted  Scheduled Rent
               consists of Adjusted  Gross  Potential  net of vacancies  and bad
               debt expense.




                                       9


<PAGE>


     Item 3. Legal Proceedings

     Neither  the  Company  nor any of its  apartment  properties  is  presently
     subject to any material litigation nor, to the Company's knowledge,  is any
     litigation  threatened against the Company or any of the properties,  other
     than routine actions  arising in the ordinary  course of business,  some of
     which are  expected to be covered by liability  insurance  and all of which
     collectively  are not  expected  to have a material  adverse  effect on the
     business or financial condition or results of operations of the Company.


     Item 4. Submission of Matters to a Vote of Security Holders

     None.


                                     PART II

     Item 5.  Market for  Registrant's  Common  Equity and  Related  Stockholder
     Matters

     The  Company's  common  shares are  traded on the New York  Stock  Exchange
     ("NYSE").  The common shares were listed on the NYSE under the symbol "TCR"
     on April 18, 1997. Before that date, there was no active trading market for
     the common  shares.  The  following  table sets forth the high and low sale
     prices on the NYSE for the common  shares (as reported by the NYSE) and the
     cash  distributions  declared and paid for each quarterly period indicated.
     On March 18, 1999,  the last reported sale price on the NYSE was $9.875 per
     common share.

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                                                   Cash Distribution
          1997                                             High                Low                 Per Common Share
          ----                                             ----                ---                 ----------------
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>                <C>                    <C>                  
          First Quarter                         .....      _                   _                     $ 0.25
---------------------------------------------------------------------------------------------------------------------------- 
          Second Quarter                        .....      $11.25              $10.25                  0.25
----------------------------------------------------------------------------------------------------------------------------
          Third Quarter                         .....       12.50               10.625                 0.25
----------------------------------------------------------------------------------------------------------------------------
          Fourth Quarter                        .....       12.4375             10.125                 0.25
----------------------------------------------------------------------------------------------------------------------------
          1998
          ----
---------------------------------------------------------------------------------------------------------------------------- 
          First Quarter                          .....    $13.25               $11.875               $ 0.25
----------------------------------------------------------------------------------------------------------------------------
          Second Quarter                         .....    $12.6875             $11.125                 0.26
----------------------------------------------------------------------------------------------------------------------------
          Third Quarter                          .....     12.125               10.25                  0.26
----------------------------------------------------------------------------------------------------------------------------
          Fourth Quarter                                   11.25                10.25                  0.26
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

     Distributions  of $38,317,602 and $31,324,870 were made to the shareholders
     during 1998 and 1997, respectively.

     The timing and  amounts of  distributions  to  shareholders  are within the
     discretion of the Company's board of directors.  Future  distributions will
     depend on the Company's  results of operations,  cash flow from operations,
     economic  conditions  and other  factors,  such as  working  capital,  cash
     requirements   to  fund   investing  and  financing   activities,   capital
     expenditure  requirements,  including  improvements  to and  expansions  of
     properties  and the  acquisition of additional  properties,  as well as the
     distribution   requirements   under  federal   income  tax  provisions  for
     qualification as a REIT.

     For federal income tax purposes,  distributions  paid to  shareholders  may
     consist of ordinary income, capital gains distributions, non-taxable return
     of capital,  or a combination  thereof.  Distributions  constitute ordinary
     income to the extent of the Company's current and accumulated  earnings and
     profits.  Distributions  which exceed the Company's current and accumulated
     earnings and profits  constitute a return of capital rather than a dividend
     to the extent of a shareholder's  basis in his common shares and reduce the
     shareholder's basis in the common shares. To the extent that a distribution
     exceeds both the Company's current and accumulated earnings and profits and
     the  shareholder's  basis in his common shares,  it is generally treated as
     gain from the sale or exchange of that  shareholder's  common  shares.  The
     Company notifies shareholders annually as to the taxability of

                                       10
<PAGE>


     distributions paid during the preceding year. In 1998, approximately 20% of
     distributions  represented a return of capital, and the balance represented
     ordinary income.

     The Company has adopted a Dividend  Reinvestment  and Share  Purchase  Plan
     under which any record holder of common shares may reinvest cash  dividends
     and may invest  additional  cash  payments  of up to $15,000 per quarter in
     common shares.

     The agreement pertaining to the Company's Unsecured Line of Credit contains
     certain covenants that, among other things,  require maintenance of certain
     financial ratios, and include restrictions on the Company's ability to make
     distribution to its shareholders over certain amounts.

     On March  18,  1999,  there  were  18,946  shareholders  of  record  of the
     Company's common shares.

     Item 6. Selected Financial Data

     The following  table sets forth selected  financial data for the registrant
     and should be read in conjunction with the financial statements and related
     notes of the Company included under Item 8 of this report.


<TABLE>

As of December 31,                                      1998              1997             1996              1995           1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>              <C>              <C>        
Operating Results
Rental Income                                        $88,752,254      $70,115,678      $40,261,674      $16,266,610      $8,158,994
Net Income (Loss)                                     23,210,642       19,225,553       (4,169,849)       5,229,715       2,386,303
Distributions Declared and Paid                       38,317,602       31,324,870       15,934,901        6,316,185       2,977,136
-----------------------------------------------------------------------------------------------------------------------------------

Per Share
Net Income (Loss)                                          $0.62            $0.59           $(0.21)           $0.64           $0.60
Distributions                                              $1.03            $1.00            $0.99            $0.96           $0.89
Distributions Representing Return of Capital                  20%              23%              14%              17%             21%
Weighted Average Shares Outstanding-Basic             37,630,546       32,617,823       20,210,432        8,176,803       4,000,558
-----------------------------------------------------------------------------------------------------------------------------------

Balance Sheet Data
Investment in Rental Property                       $587,438,358     $487,575,196     $329,715,853     $129,696,447     $54,107,358
Total Assets                                        $552,347,608     $474,186,450     $322,870,574     $133,181,032     $57,257,950
Notes Payable                                       $201,892,999     $151,569,147      $55,403,000       $8,300,000      $5,000,000
Shareholders' Equity                                $339,171,496     $315,328,252     $254,569,705     $122,154,420     $51,436,863
Shares Outstanding                                    39,113,917       35,510,327       28,141,509       12,754,331       5,458,648
-----------------------------------------------------------------------------------------------------------------------------------

Other Data
Cash Flow from:
        Operating Activities                         $45,027,655      $34,973,533      $20,162,776       $9,618,956      $3,718,086
        Investing Activities                        $(97,863,162)   $(161,969,343)   $(194,519,406)    $(75,589,089)   $(28,557,568)
        Financing Activities                         $50,911,886     $128,327,145     $170,466,134      $68,754,842     $25,519,648
Number of Properties Owned at Year-End                        58               51               40               19               9
-----------------------------------------------------------------------------------------------------------------------------------

Funds from Operations Calculation
        Net Income (Loss) Before Minority
        Interest in Operating Partnership            $23,225,335      $19,225,553      $(4,169,849)      $5,229,715      $2,386,303
          Depreciation of Real Estate                 20,741,130       15,163,593        8,068,063        2,788,818       1,210,818
          Management Contract Termination (a)                 --          402,907       16,526,012               --              --
-----------------------------------------------------------------------------------------------------------------------------------
Funds from Operations (b)                            $43,966,465      $34,792,053      $20,424,226       $8,018,533      $3,597,121
</TABLE>

     (a)  Included  in the 1997 and 1996  operating  results  are  $402,907  and
     $16,526,012,  respectively,  of  management  contract  termination  expense
     resulting  from  the  company's  conversion  to   "self-administered"   and
     "self-managed" status. See Note 6 to the consolidated financial statements.

     (b) "Funds from  operations"  is defined as income before gains (losses) on
     investments, minority interest of unitholders in operating partnership, and
     extraordinary   items  (computed  in  accordance  with  generally  accepted
     accounting principles),  plus real estate depreciation and after adjustment
     for significant nonrecurring items, if any. This definition conforms to the
     recommendations  set  forth  in a  White  Paper  adopted  by  the  National
     Association  of  Real  Estate  Investment   Trusts  (NAREIT).   Funds  from
     operations  for years  prior to 1996 have been  adjusted  to conform to the
     NAREIT   definition.   The  company  considers  funds  from  operations  in
     evaluating  property  acquisitions  and  its  operating  performance,   and
     believes that funds from  operations  should be considered  along with, but
     not as an  alternative  to,  net  income and cash flows as a measure of the
     company's operating performance and liquidity. Funds from operations, which
     may not be comparable to other  similarly  titled  measures of other REITs,
     does not represent cash  generated from operating  activities in accordance
     with  generally  accepted  accounting  principles  and is  not  necessarily
     indicative of cash available to fund cash needs.


                                       11
<PAGE>

     Item 7 and 7A. Management's  Discussion and Analysis of Financial Condition
     and Results of Operations/Market Risk Disclosure.

     Overview
     The  company  operates  in 10 major  markets  and 16  markets  overall.  At
     December 31, 1998,  the company did not own more than 20% of its  apartment
     communities in any one market. The following table summarizes the company's
     major apartment market information.

<TABLE>
<CAPTION>
                           Number of                                                                        December
                           Apartment                                  % of Total Cost      1998 Annual Average      Monthly
         Market            Communities       Total Cost       of Apartments     Economic Occupancy        Rental Rate
----------------------------------------------------------------------------------------------------------------------
<S>                            <C>          <C>                  <C>                 <C>                  <C>    
         Raleigh\Durham, NC    12           $119,438,253         20%                  92.0%               $676
         Charlotte, NC         10            113,412,242         19                   92.5                 603
         Atlanta, GA            5             68,635,552         12                   91.6                 698
         Richmond, VA           4             50,960,742          9                   94.5                 607
         Virginia Beach, VA     5             38,534,881          7                   92.8                 634
         Greenville, SC         3             21,478,029          4                   87.7                 448
         Augusta, GA            2             19,633,483          3                   84.8                 477
         Winston-Salem, NC      2             18,617,499          3                   95.6                 631
         Wilmington, NC         3             18,687,728          3                   85.9                 584
         Columbia, SC           2             17,334,265          3                   93.2                 610
         Other                 10            100,705,684         17                   94.8                 578
----------------------------------------------------------------------------------------------------------------------
         Total                 58           $587,438,358        100%                  92.1%               $608

</TABLE>

     The  following  discussion  is based  on the  financial  statements  of the
     company as of December 31, 1998, 1997, and 1996. This information should be
     read in  conjunction  with the selected  financial  data and the  company's
     consolidated financial statements included elsewhere in this annual report.
     The  company is  operated  and has  elected to be treated as a real  estate
     investment trust (REIT) for federal income tax purposes.

     Results of  Operations

     Comparison  of the year ended  December 31, 1998 to
     December 31, 1997

     Income and Occupancy.  The results of the company's property operations for
     the year ended December 31, 1998 include the results of operations from the
     pre-1998  acquisitions and from the seven properties  acquired in 1998 from
     their respective acquisition dates. The company's portfolio consisted of 58
     properties at December 31, 1998. The increased  rental income and operating
     expenses for the year ended December 31, 1998, over the year ended December
     31, 1997,  is primarily due to a full year of operation in 1998 of the 1997
     acquisitions as well as the incremental effect of the 1998 acquisitions.

     The principal  source of the company's  revenue is the rental  operation of
     its  apartment  communities.   Rental  income  increased  27%  in  1998  to
     $88,752,254,  up $18,636,576 over 1997 due to the factors  described above.
     Rental  income is  expected  to  continue  to  increase  from the impact of
     planned  improvements,  which are being  made in an effort to  improve  the
     properties' marketability, economic occupancies, and rental rates.

     Overall average economic  occupancy was 92% in 1998 and 1997.  Rental rates
     for the  portfolio  increased  4% to $608 on December  31,1998 from $582 on
     December  31,  1997.  This  increase is due to a  combination  of increased
     rental rates from new leases and property renovation and the acquisition of
     properties with higher average rental rates.

     Expenses.   Total  property   expenses,   excluding   management   contract
     termination, increased 29% to $58,236,673 in 1998 from $45,111,959 in 1997,
     due largely to the  increase  in the number of  apartments.  The  operating
     expense  ratio (the ratio of operating  expenses,  excluding  depreciation,
     amortization,  general and  administrative,  and other expenses,  to rental
     income)  decreased to 38% in 1998 from 39% in 1997 and is  attributable  to
     economies of scale  achieved in property  management  and certain  property
     operation functions.

     General and  administrative  expenses  totaled 1.9% of revenues in 1998 and
     1997. These expenses represent the  administrative  expenses of the company
     as distinguished from the operations of the company's properties.  In 1998,
     the  company  has   continued   to  expand  its   internal   administrative
     infrastructure to keep pace with its growth.

     Depreciation  of  real  estate   increased  to  $20,741,130  in  1998  from
     $15,163,593 in 1997,  and is directly  attributable  to the  acquisition of
     apartment communities in 1998 and a full year of depreciation of properties
     acquired in 1997.

     Interest and Investment  Income and Expense.  The company  earned  interest
     income of $71,474 in 1998 and  $77,942 in 1997 from the  investment  of its
     cash and cash reserves.  The company incurred $12,004,120 and $7,006,182 of
     interest expense in 1998 and 1997, respectively, associated with short-term
     borrowings under its line of credit.  This is a result of the increased use
     of 


                                       12
<PAGE>

     its line of credit to fund acquisitions. The weighted average interest rate
     on the line of credit was 6.9% and 7.2% during 1998 and 1997, respectively.

     Income and Expense from Relationship  with Apple Residential  Income Trust.
     The company or affiliates provides property management,  advisory, and real
     estate  brokerage   services  for  Apple  Residential  Income  Trust,  Inc.
     ("Apple"),  a real estate investment trust established by Glade Knight. The
     company also owns 417,778  shares of Apple which  represents  approximately
     1.5% of Apple's outstanding shares at December 31, 1998 and has first right
     of refusal to purchase Apple.

     Property management fees charged to Apple are 5% of monthly gross revenues.
     Advisory fees charged to Apple are .1% to .25% of total  capital  raised by
     Apple.  Real estate  commissions  are generally 2% of the purchase price of
     each property Apple acquires.  The company received  $2,220,593 in 1998 and
     $822,934 in 1997 for advisory and property management services. The company
     received $2,665,100 in 1998 and $1,031,066 in 1997 in real estate brokerage
     commissions  under separate  contract.  The company  amortized into expense
     $1,054,470  in 1998 and $546,000 in 1997 of the $2 million  purchase  price
     the company paid for the  acquisition  of the brokerage  services  contract
     with Apple.  Income from the company's  investment in Apple was $340,483 in
     1998  and  $253,172  in 1997.  (See  Note 6 to the  consolidated  financial
     statements.)

     Same Property  Results.  On a comparative  basis,  the 38 properties  owned
     during  all of 1998  and 1997  provided  rental  and  operating  income  of
     $58,849,953  and  $37,432,526,  respectively,  in 1998 and  $56,493,897 and
     $35,480,876  in 1997.  This  represents an increase from 1997 to 1998 of 4%
     and 6%, respectively. Certain current reported expenses, which approximated
     $228,000,  have been excluded to make for a more  meaningful  comparison to
     1997.

     Comparison of the year ended December 31, 1997 to December 31, 1996

     Conversion to  Self-Administration.  Effective October 1, 1996, the company
     agreed with its affiliated advisor and management  companies on a series of
     transactions,  the  effect  of which  was to  convert  the  company  into a
     "self-administered"  and "self-managed" REIT. The Board of Directors of the
     company unanimously approved the transactions.  The conversion was approved
     because it was expected to reduce  future  operating  expenses  compared to
     what those expenses would have been under the formerly  "externally managed
     and  advised"  arrangements.  The net effect of these  savings on  earnings
     basic and diluted per share is  partially  offset by the issuance of common
     shares to effect the transaction as described below.

     Pursuant to this conversion, the company agreed to issue 1.4 million common
     shares,  with 700,000  shares issued in October 1996 and 700,000  shares on
     September  30,  1997,  and paid  approximately  $1,913,000  to the  various
     entities for several assets and various  contracts.  This  transaction  was
     accounted for as the termination of management contracts and resulted in an
     expense of $16,526,012  in 1996 and $402,907 in 1997.  This expense was the
     primary factor in the company's net loss of $4,169,849 ($.21 per share) for
     1996 versus net income of $19,225,553 ($.59 per share) in 1997. (See Note 6
     to the consolidated financial statements.)

     Income and Occupancy.  The company had increased rental income and expenses
     in 1997  and  1996 due to the full  year of  operations  from the  pre-1997
     acquisitions  and  from  the 13  properties  acquired  in 1997  from  their
     respective acquisition dates. Rental income increased 74% to $70,115,678 in
     1997 from $40,261,674 in 1996.

     The properties had an average occupancy of 92% during 1997 and 91% in 1996.
     Overall,  rental rates for the  portfolio  increased 6% to $582 on December
     31,1997  from  $549  on  December  31,  1996.  This  increase  is  due to a
     combination  of  increased  rental  rates  from  new  leases  and  property
     renovation  and the  acquisition  of properties  with higher average rental
     rates.

     Same Property  Results.  On a comparative  basis,  the 19 properties  owned
     during  all of 1997  and 1996  provided  rental  and  operating  income  of
     $27,476,460  and  $16,566,239,  respectively,  in 1997 and  $25,508,627 and
     $14,587,654  in 1996.  This  represents an increase from 1996 to 1997 of 8%
     and 14%, respectively.  The conversion to "self-administration"  took place
     in October  1996.  Therefore,  the actual  results for property  operations
     contained a partial  year of  management  fees in 1996.  In order to make a
     meaningful comparison of operating income for these properties between 1996
     and 1997, property management fees were eliminated in 1996. This adjustment
     allows for a comparison on a "self-administered"  and "self-managed" basis.
     As adjusted,  the properties  provided  operating  income of $15,429,270 in
     1996. This  represents an operating  increase of 7% for 1997 over 1996. The
     eliminated expenses included property management fees of $841,616 in 1996.

     Expenses.   Total  property   expenses,   excluding   management   contract
     termination, increased 69% to $45,111,959 in 1997 from $26,764,844 in 1996,
     due largely to the  increase  in the number of  apartments.  The  operating
     expense  ratio (the ratio of operating  expenses,  excluding  depreciation,
     amortization,  general and administrative  expenses,  and other expenses to
     rental  income)  was  39% in 1997  and  43% in  1996.  The  decline  in the
     operating expense ratio is attributable to the conversion of the company to
     "self-administered"  and "self-advised"  status and increasing economies of
     scale based on the company's growing portfolio of properties.


                                       13
<PAGE>

     General and  administrative  expenses  totaled 1.9% of revenues in 1997 and
     3.2% in 1996. These expenses represent the  administrative  expenses of the
     company as distinguished  from the operations of the company's  properties.
     In 1997,  the  company  continued  to expand  its  internal  administrative
     infrastructure to keep pace with its growth.

     Depreciation  of  real  estate   increased  to  $15,163,593  in  1997  from
     $8,068,063  in 1996,  and the  increase  is  directly  attributable  to the
     acquisition of apartment communities in 1996 and 1997.

     Interest and Investment  Income and Expense.  The company  earned  interest
     income of $75,927 in 1997 and $287,344 in 1996 from the  investment  of its
     cash  and  cash  reserves.  The  decrease  is  due to  the  company's  cash
     management  policy of paying  down on the  unsecured  line of credit  which
     incurred a higher rate of interest than what the company would have earned.
     The company incurred  $7,006,182 and $1,272,530 of interest expense in 1997
     and 1996,  respectively,  associated with short-term  borrowings  under its
     line of credit. This is a result of the increased use of its line of credit
     to fund  acquisitions.  The weighted  average  interest rate on the line of
     credit during 1997 and 1996 was 7.2%.

     Liquidity and Capital Resources

     Equity.  During 1998, the company raised $30 million by issuing 2.6 million
     common shares through its participation in a Unit Investment  Trust,  which
     resulted in $28.1  million net proceeds to the company after the payment of
     underwriting  discounts,  commissions,  and  other  direct  costs.  The net
     proceeds were used to curtail the company's unsecured line of credit.

     During 1998, the company  purchased  seven  properties  consisting of 1,540
     apartment   units  for  $74  million  and  made  $26  million  of  property
     improvements  through use of increases in its line of credit,  reinvestment
     of  distributions,  additional  equity  raises,  and  issuance of operating
     partnership  units.   These  acquisitions   brought  the  total  number  of
     residential rental communities to 58 and the total apartment units owned at
     year-end to 13,462.

     Notes Payable. The company intends to acquire additional properties and may
     seek to fund these  acquisitions  through a combination of equity offerings
     and unsecured  corporate debt. In 1997, the company obtained a $175 million
     unsecured  line of credit (the  "Unsecured  Line") with a consortium of six
     banks.  During October 1998, the company closed a $25 million  extension on
     the  Unsecured  Line,  bringing  the maximum  permitted  borrowing  to $200
     million.  The $25  million  extension  is due on April  15,  1999,  and the
     remaining  balance expires on October 30, 2000. The company is currently in
     negotiations   with  its  lenders  to  extend  the   maturities   of  these
     obligations.  The line currently  bears interest at the LIBOR rate plus 135
     basis points.  The company  anticipates  curtailing the line of credit with
     the proceeds of future offerings.

     In addition to the above, the company also has an additional unsecured line
     of  credit  which is used for  general  corporate  purposes  (the  "General
     Purpose Line") in the amount of $5 million.  The General Purpose Line bears
     interest at LIBOR plus 160 basis points and is due on March 31, 1999.

     At year-end,  the company had an outstanding balance of $196 million on the
     Unsecured Line and $343,000 on the General Purpose Line.

     The company  also  carried a $5.5 million  unsecured  debenture  bearing an
     effective  interest  rate of 6.65%  per  annum.  This  debt is to a private
     lender and is due in June 1999.

     Capital  Requirements.  The  company  has an  ongoing  capital  expenditure
     commitment to fund its renovation program for recently acquired properties.
     In addition, the company expects to acquire new properties during the year.
     The company  anticipates that it will continue to operate as it did in 1998
     and fund these cash  needs  from a variety  of  sources  including  equity,
     excess cash flow from operations over  distributions,  debt provided by its
     line of credit,  and issuance of operating  partnership  units. The company
     may seek to obtain additional debt financing to meet its objectives.  Given
     the company's  current debt level, the company is confident that it will be
     able to obtain debt financing  from a variety of sources,  both secured and
     unsecured.

     The company continues to renovate its properties.  In connection with these
     renovations,  the company capitalized  improvements of $26 million in 1998.
     Approximately $18 million of additional  capital  improvements are budgeted
     for 1999 on the existing property portfolio.

     The  company  has  short-term  cash  flow  needs in order  to  conduct  the
     operation  of  its  properties.   The  rental  income  generated  from  the
     properties  supplies  sufficient  cash to provide  for the payment of these
     operating expenses and the payment of distributions.

     Capital  resources  are expected to grow with the future sale of its shares
     and  from  cash  flow  from  operations.  Approximately  28%  of  all  1998
     distributions,  totaling $10,873,529,  were reinvested in additional common
     shares.  In general,  the  company's  liquidity  and capital  resources are
     believed  to be more than  adequate  to meet its cash  requirements  during
     1999.


                                       14
<PAGE>


     The  company is  operated  as, and  annually  elects to be taxed as, a real
     estate  investment trust under the Internal Revenue Code. As a result,  the
     company  has no  provision  for  taxes  and thus  there is no effect on the
     company's liquidity from taxes.

     Apple  Residential  Income  Trust.  In 1997,  Apple  granted  the company a
     continuing  right to own up to 9.8% of the  common  shares  of Apple at the
     market  price,  net of  selling  commissions.  Apple also has  granted  the
     company a first right of refusal to purchase the business or  properties of
     Apple. (See Note 6 to the consolidated financial statements.)

     Impact of Year 2000. The Year 2000 issue is the result of computer programs
     being written  using two digits  rather than four to define the  applicable
     year.  Any of  the  company's  computer  programs  or  hardware  that  have
     date-sensitive  software or embedded  chips may recognize a date using "00"
     as the year 1900 rather than the year 2000.  This could  result in a system
     failure or  miscalculations  causing  disruptions  of operations  including
     among other  things a temporary  inability  to process  transactions,  send
     invoices or engage in similar normal business activities.

     The company has completed an assessment of its programs and determined that
     it will  require  upgrading  portions of its  software so that its computer
     systems will  function  properly with respect to dates in the year 2000 and
     thereafter,  as well as upgrading certain computer hardware. The company is
     actively  engaged  in  upgrading  the  computer   systems.   The  company's
     accounting,  property management,  human resource, and payroll applications
     are classified as year 2000 compliant by their respective  software vendors
     once upgraded. As the software is upgraded,  the company will begin testing
     their  compliancy,  which will be included in the  overall  system  testing
     which is scheduled to be  completed in the second  quarter of 1999.  To the
     extent such  vendors are unable to perform  services due to their year 2000
     related issues, the company will seek other similar vendors who are capable
     of providing services.

     The company is also  exposed to the risk that one or more of its vendors or
     service  providers  could  experience  year 2000  problems  that impact the
     ability of such vendor or service  provider to provide  goods and services.
     Though this is not  considered  as  significant  a risk with respect to the
     suppliers of goods, due to the availability of alternative  suppliers,  the
     disruption of certain services,  such as utilities,  could,  depending upon
     the  extent  of the  disruption,  have a  material  adverse  impact  on the
     company's  operations.  To date,  the company is not aware of any vendor or
     service  provider  year 2000 issue that  management  believes  would have a
     material adverse impact on the company's  operations.  However, the company
     has no means of ensuring that its vendors or service providers will be year
     2000 ready. The inability of vendors or service providers to complete their
     year 2000  resolution  process  in a timely  fashion  could have an adverse
     impact on the company.  The effect on  non-compliance by vendors or service
     providers is not determinable at this time.

     The company  utilizes  microprocessors  which are imbedded in systems which
     are part of the company's operations. In particular,  year 2000 problems in
     the HVAC,  elevator,  telephone,  security,  or other  such  systems at the
     properties could disrupt operations at the affected properties. The company
     completed an assessment of these systems in 1998 and has an ongoing plan to
     make all  systems  compliant.  At this  point,  based on the  status of its
     assessment,  the company does not believe  these systems will be materially
     non-compliant.   Additionally,   many  of  these  systems,   which  operate
     automatically,  can be operated  manually;  and  consequently  in the event
     these  systems  experience a failure as a result of the year 2000  problem,
     the  disruption  caused  by such  failure  should  not be  material  to the
     company's operations.

     Failure  to  correct  a  material  year  2000  problem  could  result in an
     interruption  in, or a failure of,  certain normal  business  activities or
     operations.  The company believes that, with the  implementation  of new or
     upgraded  business  systems  and  completion  of the year 2000  project  as
     scheduled,   the  possibility  of  significant   interruptions   of  normal
     operations  due to the failure of those  systems will be reduced.  However,
     the  company  is also  dependent  upon  the  power  and  telecommunications
     infrastructure  within  the  United  States.  The  most  reasonable  likely
     worst-case scenario would be that the company may experience  disruption in
     its  operations  if any of these  third-party  suppliers  reported a system
     failure.  Although the company's year 2000 project will reduce the level of
     uncertainty about the compliance and readiness of its material  third-party
     providers, due to the general uncertainty over year 2000 readiness of these
     third-party  suppliers,  the  company is unable to  determine  at this time
     whether the consequences of year 2000 failures will have a material impact.

     There  should be no  additional  cost to the company for the  software  and
     computer  hardware  upgrades.  The  software  upgrades  are included in the
     annual  maintenance fee paid by the company to the vendors and the computer
     hardware  upgrades  are  included  in the  ordinary  course  of  operations
     regardless  of the year 2000 issue.  Substantially  all of those costs have
     been  expensed as incurred  in 1998 and the  remaining  will be expensed as
     incurred during the first quarter of 1999.

     The company has contingency plans for certain critical  applications and is
     working on such plans for others.  These contingency  plans involve,  among
     other actions,  manual  workarounds and contracting with vendors capable of
     providing services.

     Management  believes it is devoting the resources necessary to achieve year
     2000 readiness in a timely manner.



                                       15
<PAGE>

     Market Risk Disclosure

     Substantially  all of the  company's  market risk is exposure to short-term
     interest rates from variable rate borrowings under its line of credit.  The
     line of credit bears interest at one month LIBOR plus 135 basis points. The
     company utilizes  variable rate debt up to specified limits to total market
     capitalization. The company currently is seeking alternatives to reduce its
     interest  costs  and is  considering  replacing  a portion  of the  amounts
     outstanding under its lines of credit with fixed rate longer maturity debt.

     The company has  analyzed  its  interest  rate risk  exposure.  The company
     believes that interest rates will remain stable at current levels. However,
     if market interest rates for this type of credit facility average 100 basis
     points more in 1999 than they did in 1998, the company's  interest  expense
     would  increase,  and net income  would  decrease by $1.72  million.  These
     amounts are determined by considering the impact of  hypothetical  interest
     rates on the company's  borrowing cost.  These analyses do not consider the
     effects of the reduced overall  economic  activity that could exist in such
     an  environment.  Further,  in the  event  of a change  of such  magnitude,
     management  would likely take  actions to further  mitigate its exposure to
     the change.  However,  due to the uncertainty of the specific  actions that
     would be taken and their possible effects, the sensitivity analysis assumes
     no changes in the company's financial structure.

     Impact of  Inflation.  The company does not believe that  inflation had any
     significant  impact  on  its  operation  of the  company  in  1998.  Future
     inflation, if any, would likely cause increased operating expenses, but the
     company  believes that  increases in expenses  would be more than offset by
     increases in rental  revenues.  Continued  inflation may also cause capital
     appreciation  of the  companys  properties  over time, as rental rates and
     replacement costs increase.




                                       16
<PAGE>

     Item 8. Financial Statements and Supplementary Data


     Report of Independent Auditors

     The Board of Directors and  Shareholders
     Cornerstone  Realty Income Trust, Inc. 

     We have audited the accompanying consolidated balance sheets of Cornerstone
     Realty Income Trust, Inc. (the "Company") as of December 31, 1998 and 1997,
     and  the  related  consolidated  statements  of  operations,  shareholders'
     equity,  and cash  flows for each of the three  years in the  period  ended
     December  31,  1998.  Our audits  also  included  the  financial  statement
     schedule listed in the Index at Item 14(a). These financial  statements and
     schedule  are  the   responsibility  of  the  Company's   management.   Our
     responsibility  is to express an opinion on these financial  statements and
     schedule based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
     standards.  Those  standards  require that we plan and perform the audit to
     obtain reasonable assurance about whether the financial statements are free
     of material  misstatement.  An audit includes  examining,  on a test basis,
     evidence   supporting   the  amounts  and   disclosures  in  the  financial
     statements. An audit also includes assessing the accounting principles used
     and  significant  estimates made by  management,  as well as evaluating the
     overall  financial  statement  presentation.  We  believe  that our  audits
     provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
     present  fairly,  in all  material  respects,  the  consolidated  financial
     position of Cornerstone  Realty Income Trust, Inc. at December 31, 1998 and
     1997, and the consolidated results of its operations and its cash flows for
     each  of the  three  years  in the  period  ended  December  31,  1998,  in
     conformity  with generally  accepted  accounting  principles.  Also, in our
     opinion,  the related  financial  statement  schedule,  when  considered in
     relation  to the  basic  financial  statements  taken as a whole,  presents
     fairly in all material respects the information set forth therein.


                                             /s/ Ernst & Young LLP

     Richmond, Virginia 
     January 25, 1999


                                       17

<PAGE>


<TABLE>
<CAPTION>

         Financial Information
         Consolidated Balance Sheets


         December 31,                                                     1998                    1997   
---------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                    <C>
         ASSETS:
         Investment in rental property
         Land                                                          $87,100,659            $76,812,953
         Buildings and property improvements                           487,972,647            402,545,094
         Furniture and fixtures                                         12,365,052              8,217,149
---------------------------------------------------------------------------------------------------------
                                                                       587,438,358            487,575,196

         Less accumulated depreciation                                 (48,227,760)           (27,486,630)
---------------------------------------------------------------------------------------------------------
                                                                       539,210,598            460,088,566

         Cash and cash equivalents                                       2,590,364              4,513,986
         Prepaid expenses                                                1,372,498                797,484
         Other assets                                                    9,174,148              8,786,414
---------------------------------------------------------------------------------------------------------
         Total Assets                                                 $552,347,608           $474,186,450
=========================================================================================================

         LIABILITIES AND SHAREHOLDERS' EQUITY

         LIABILITIES:
         Notes payable                                                $201,892,999           $151,569,147
         Accounts payable                                                4,301,682              3,812,578
         Accrued expenses                                                2,730,418              1,158,014
         Rents received in advance                                         506,649                463,997
         Tenant security deposits                                        1,729,671              1,854,462
---------------------------------------------------------------------------------------------------------
         TOTAL LIABILITIES                                             211,161,419            158,858,198
=========================================================================================================

         Minority interest of unitholders in operating partnership       2,014,693                     --

         SHAREHOLDERS' EQUITY:
         Preferred stock, no par value, authorized 25,000,000
            Shares: issued and outstanding 0 shares                             --                     --
         Common stock, no par value, authorized 100,000,000
            shares; issued and outstanding 39,113,917 shares
            and 35,510,327 shares, respectively                        388,131,512            349,135,379
         Deferred compensation                                            (108,905)               (62,976)
         Distributions greater than net income                         (48,851,111)           (33,744,151)
---------------------------------------------------------------------------------------------------------
         TOTAL SHAREHOLDERS' EQUITY                                    339,171,496            315,328,252
---------------------------------------------------------------------------------------------------------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                   $552,347,608           $474,186,450

</TABLE>

         See accompanying notes to consolidated financial statements.



                                       18

<PAGE>

<TABLE>
<CAPTION>

         Consolidated Statements of Operations

         Years Ended December 31,                                    1998                    1997                 1996       
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>                    <C>        
         REVENUE:
         Rental income                                           $88,752,254               $70,115,678            $40,261,674
         Other income                                              4,885,694                 1,854,946                     --
-----------------------------------------------------------------------------------------------------------------------------

         EXPENSES:
         Property and maintenance                                 24,641,642                19,494,692             11,406,042
         Taxes and insurance                                       6,986,245                 6,075,991              3,275,422
         Property management fee                                          --                        --              1,243,215
         Property management                                       2,169,552                 1,769,272              1,274,203
         General and administrative                                1,681,810                 1,351,667              1,298,970
         Amortization expense and other depreciation                  47,703                    56,075                 47,133
         Depreciation of rental property                          20,741,130                15,163,593              8,068,063
         Other                                                     1,968,591                 1,200,669                151,796
         Management contract termination                                  --                   402,907             16,526,012
-----------------------------------------------------------------------------------------------------------------------------
         Total expenses                                           58,236,673                45,514,866             43,290,856

         Income (loss) before interest income (expense)
             and minority interest in operating partnership       35,401,275                26,455,758             (3,029,182)
         Interest income                                             411,957                   331,114                287,344

         Interest expense                                        (12,587,897)               (7,561,319)            (1,428,011)
------------------------------------------------------------------------------------------------------------------------------
         Income (loss) before minority interest in
             operating partnership                                23,225,335                19,225,553             (4,169,849)

         Minority interest of unitholders in operating partnership   (14,693)                       --                     --
------------------------------------------------------------------------------------------------------------------------------
         Net income (loss)                                       $23,210,642               $19,225,553            $(4,169,849)
------------------------------------------------------------------------------------------------------------------------------
         Basic and diluted earnings (loss) per common share            $0.62                     $0.59                 $(0.21)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.


                                       19



<PAGE>

Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                 
                                                               Common Stock                           Distributions
                                                       --------------------------                         (Greater)          Total
                                                         Number                          Deferred         Less Than   Shareholders'
                                                       of Shares        Amount       Compensation        Net Income         Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>                 <C>           <C>             <C>         
BALANCE AT DECEMBER 31, 1995                           12,754,331    $123,771,504        $(77,000)     $(1,540,084)    $122,154,420

Net proceeds from the sale of shares                   13,816,973     136,183,048              --               --      136,183,048
Net loss                                                       --              --              --       (4,169,849)      (4,169,849)
Cash distributions declared/paid to
   shareholders ($.9930 per share)                             --              --              --      (15,934,901)     (15,934,901)
Shares issued in connection with
   management contract termination                        700,000       7,700,000              --               --        7,700,000
Amortization of deferred compensation                          --              --          22,000               --           22,000
Shares issued through reinvestment of
   distributions                                          870,205       8,614,987              --               --        8,614,987
-----------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1996                           28,141,509     276,269,539         (55,000)     (21,644,834)     254,569,705

Net proceeds from the sale of shares                    5,175,000      49,287,000              --               --       49,287,000
Net income                                                     --              --              --       19,225,553       19,225,553
Cash distributions declared/paid to
   shareholders ($1.00 per share)                              --              --              --      (31,324,870)     (31,324,870)
Restricted stock grant                                      2,772          29,972         (29,972)              --               --
Shares issued for purchase of
   Apple Realty Group, Inc. contracts                     150,000       1,650,000              --               --        1,650,000
Shares issued in connection with
   management contract termination                        700,000       7,700,000              --               --        7,700,000
Amortization of deferred compensation                          --              --          21,996               --           21,996
Shares issued through reinvestment of
   distributions                                        1,341,046      14,198,868              --               --       14,198,868
-----------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1997                           35,510,327     349,135,379         (62,976)     (33,744,151)     315,328,252

Net proceeds from the sale of shares                    2,612,582      28,032,107              --               --       28,032,107
Net income                                                     --              --              --       23,210,642       23,210,642
Cash distributions declared/paid to
   shareholders ($1.03 per share)                              --              --              --      (38,317,602)     (38,317,602)
Restricted stock grant                                      7,350          90,497         (90,497)              --               --
Amortization of deferred compensation                          --              --          44,568               --           44,568
Shares issued through dividend reinvestment
   plan                                                   983,657      10,873,529              --               --       10,873,529
-----------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1998                           39,113,916    $388,131,512       $(108,905)    $(48,851,111)    $339,171,496
===================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.



                                       20

<PAGE>



Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                    1998               1997             1996      
                                                                                ----------------------------------------------------
<S>                                                                             <C>                 <C>                 <C>         
CASH FLOW FROM OPERATING ACTIVITIES:
    Net income (loss)                                                           $23,210,642         $19,225,553         $(4,169,849)
    Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
       Depreciation and amortization                                             20,788,833          15,219,668           8,115,196
       Minority interest of unitholders in operating partnership                     14,693                  --                  --
       Amortization of deferred compensation                                         44,568              21,996              22,000
       Amortization of deferred financing costs                                     272,795             212,802              91,592
       Management contract  termination                                                  --             402,907          14,997,093
       Amortization of Apple Realty Group, Inc. contract                          1,054,470             546,000                  --
    Changes in operating assets and liabilities:
       Prepaid expenses                                                            (575,014)           (239,940)           (390,392)
       Other assets                                                              (1,762,702)         (2,103,728)         (1,377,028)
       Accounts payable                                                             489,104           1,724,905           1,531,982
       Accrued expenses                                                           1,572,404            (208,839)            109,622
       Rent received in advance                                                      42,652             (27,931)            362,280
       Tenant security deposits                                                    (124,791)            200,140             870,280
------------------------------------------------------------------------------------------------------------------------------------
                    Net cash provided by operating activities                    45,027,655          34,973,533          20,162,776
------------------------------------------------------------------------------------------------------------------------------------

CASH FLOW FROM INVESTING ACTIVITIES:
       Acquisitions of rental property, net of debt assumed                     (71,883,993)       (134,900,712)       (175,471,367)
       Capital improvements                                                     (25,979,169)        (22,958,631)        (19,048,039)
       Investment in Apple Residential Income Trust, Inc.                                --          (3,760,000)                 --
       Apple Realty Group, Inc. contract purchase                                        --            (350,000)                 --
------------------------------------------------------------------------------------------------------------------------------------
                    Net cash used in investing activities                       (97,863,162)       (161,969,343)       (194,519,406)
------------------------------------------------------------------------------------------------------------------------------------

CASH FLOW FROM FINANCING ACTIVITIES:
       Proceeds from short-term borrowings                                      118,289,852         442,927,152         135,653,144
       Repayments of short-term borrowings                                      (67,966,000)       (346,761,005)        (94,050,144)
       Net proceeds from issuance of shares                                      38,905,636          63,485,868         144,798,035
       Cash distributions paid to shareholders                                  (38,317,602)        (31,324,870)        (15,934,901)
------------------------------------------------------------------------------------------------------------------------------------
         Net cash provided by financing activities                               50,911,886         128,327,145         170,466,134
------------------------------------------------------------------------------------------------------------------------------------

    Increase (decrease) in cash and cash equivalents                             (1,923,622)          1,331,335          (3,890,496)

         Cash and cash equivalents, beginning of year                             4,513,986           3,182,651           7,073,147
------------------------------------------------------------------------------------------------------------------------------------

         Cash and cash equivalents, end of year                                  $2,590,364          $4,513,986          $3,182,651
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.




                                       21
<PAGE>

     Notes to Consolidated Financial Statements

     Note 1 General Information and Summary of Significant Accounting Policies

     Business.   Cornerstone  Realty  Income  Trust,  Inc.  (together  with  its
     subsidiaries,  the "company"), a Virginia corporation, is an owner-operator
     of one business segment consisting of residential  apartment communities in
     the  mid-Atlantic  and  southeastern  regions  of the  United  States.  The
     accompanying  consolidated financial statements include the accounts of the
     company along with its subsidiaries,  Cornerstone REIT Limited Partnership,
     Apple Residential Advisors, Inc., Apple Residential Management Group, Inc.,
     and CRIT-NC, LLC. As of December 31, 1998, Cornerstone Realty Income Trust,
     Inc.  owns  1,403,445  operating  units  representing  an 88%  interest  in
     Cornerstone   REIT,   L.P.  All  significant   intercompany   accounts  and
     transactions  have been eliminated in  consolidation.  The company's common
     stock trades on the New York Stock Exchange under the ticker symbol "TCR."

     Certain  previously  reported amounts have been  reclassified to conform to
     the current year presentation.

     Summary of New  Accounting  Pronouncements.  As of  January  1,  1998,  the
     company adopted Statement 130, "Reporting  Comprehensive Income." Statement
     130  establishes  new rules for the reporting and display of  comprehensive
     income and its components;  however,  the adoption of this Statement had no
     impact on the company's  net income or  shareholders'  equity.  The company
     does  not  currently  have  any  items of  comprehensive  income  requiring
     separate reporting and disclosure.

     Cash  and  Cash  Equivalents.   Cash  equivalents   include  highly  liquid
     investments  with  original  maturities  of three months or less.  The fair
     market  value of cash  and cash  equivalents  approximates  their  carrying
     value.

     Investment  in  Rental  Property.  The  investment  in rental  property  is
     recorded  at the  cost,  net of  depreciation,  and  includes  real  estate
     brokerage  commissions  paid to Cornerstone  Realty Group, a related party,
     for  purchases  prior to October 1, 1996.  (See Note 6 to the  consolidated
     financial statements.)

     The  company  records  impairment  losses  on rental  property  used in the
     operations if indicators of impairment  are present,  and the  undiscounted
     cash flows estimated to be generated by the respective  properties are less
     than  their  carrying  amount.   Impairment  losses  are  measured  as  the
     difference  between  the  asset's  fair  value  less cost to sell,  and its
     carrying value. No impairment losses have been recorded to date.

     Repairs and  maintenance  costs are expensed as incurred while  significant
     improvements,  renovations, and replacements are capitalized.  Depreciation
     is computed on a straight-line basis over the estimated useful lives of the
     related  assets which are 27.5 years for buildings  and major  improvements
     and a range from five to seven years for furniture and fixtures.

     Income Recognition.  Rental income, interest, and other income are recorded
     on an accrual basis. The company's properties are leased under leases that,
     typically, have terms that do not exceed one year.

     Stock Incentive Plans. The company elected to follow Accounting  Principles
     Board Opinion No. 25,  "Accounting  for Stock Issued to Employees" (APB 25)
     and related  Interpretations  in accounting for its employee stock options.
     As discussed in Note 5, the alternative fair value accounting  provided for
     under FASB Statement No. 123,  "Accounting for  Stock-Based  Compensation,"
     ("FASB  123")  requires  use of  option  valuation  models  that  were  not
     developed for use in valuing employee stock options.  Under APB 25, because
     the exercise  price of the  company's  employee  stock  options  equals the
     market price of the underlying  stock on the date of grant, no compensation
     expense is recognized.

     Advertising  Costs.  Costs incurred for the production and  distribution of
     advertising are expensed as incurred.

     Earnings Per Common Share.  Basic and diluted earnings per common share are
     calculated in accordance  with FASB Statement No. 128 "Earnings Per Share."
     Basic earnings per common share is computed based upon the weighted average
     number of shares outstanding during the year. Diluted earnings per share is
     calculated  after giving  effect to all  potential  common shares that were
     dilutive and outstanding for the year. Operating  Partnership units are not
     included in diluted earnings per share calculations since the impact is not
     dilutive.

     Federal Income Taxes. The company is operated as, and annually elects to be
     taxed as, a real estate investment trust under the Internal Revenue Code of
     1986, as amended (the "Code").  Generally,  a real estate  investment trust
     which complies with the provisions of the Code and distributes at least 95%
     of its taxable income to its shareholders does not pay federal income taxes
     on its  distributed  income.  Accordingly,  no provision  has been made for
     federal income taxes.

     For income tax  purposes,  distributions  paid to  shareholders  consist of
     ordinary   income  and  return  of  capital  or  a   combination   thereof.
     Distributions  per share were  $1.03,  $1.00,  and $.993 in the years ended
     December 31, 1998,  1997,  and 1996,  respectively.  In 1998,  of the total
     distribution, 80% was taxable as ordinary income, and 20% was a non-taxable
     return of capital. 


                                       22
<PAGE>

     In 1997, of the total distribution, 77% was taxable as ordinary income, and
     23% was a  non-taxable  return of  capital.  In 1996,  86.4% was taxable as
     ordinary income, and 13.6% was a non-taxable return of capital.

     Use of Estimates.  The  preparation  of financial  statements in accordance
     with generally accepted  accounting  principles requires management to make
     certain  estimates  and  assumptions  that affect  amounts  reported in the
     financial statements and accompanying notes. Actual results may differ from
     those estimates.


     Note 2 Investment in Rental Property

     The following is a summary of rental property owned at December 31, 1998.




<TABLE>
<CAPTION>

                                                               Initial             Total       Accumulated             Date
         Description                                   Acquisition Cost      Investment*      Depreciation         Acquired
----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>         <C>             
         NORTH CAROLINA

         RALEIGH/DURHAM, NORTH CAROLINA
         The Hollows                                         $4,200,000       $6,173,553        $1,083,582        June 1993
         The Trestles                                        10,350,000       11,498,537         1,518,361    December 1994
         The Landing                                          8,345,000       10,055,764           910,146         May 1996
         Highland Hills                                      12,100,000       14,421,444         1,238,766   September 1996
         Parkside at Woodlake                                14,663,886       15,119,409         1,106,811   September 1996
         Deerfield                                           10,675,000       11,218,179           878,888    November 1996
         Paces Arbor                                          5,588,219        5,970,315           335,625       March 1997
         Paces Forest                                         6,473,481        6,958,627           393,683       March 1997
         Clarion Crossing                                    10,600,000       11,076,591           392,229   September 1997
         St. Regis                                            9,800,000       10,135,730           348,402     October 1997
         Remington Place                                      7,900,000        8,457,508           299,125     October 1997
         The Timbers                                          8,100,000        8,352,596           139,998        June 1998

         CHARLOTTE, NORTH CAROLINA
         Hanover Landing                                      5,725,000        7,449,266           825,849      August 1995
         Sailboat Bay                                         9,100,000       13,464,303         1,414,467    November 1995
         Bridgetown Bay                                       5,025,000        5,845,929           565,523       April 1996
         Meadow Creek                                        11,100,000       12,504,352         1,170,665         May 1996
         Beacon Hill                                         13,579,203       14,695,613         1,176,300         May 1996
         Summerwalk                                           5,660,000        7,538,671           622,468         May 1996
         Paces Glen                                           7,425,000        8,129,400           554,771        July 1996
         Heatherwood                                         17,630,457       23,397,697         1,312,815               **
         Charleston Place                                     9,475,000       10,210,482           559,521         May 1997
         Stone Point                                          9,700,000       10,176,529           345,740     January 1998

         WINSTON-SALEM, NORTH CAROLINA
         Mill Creek                                           8,550,000        9,584,482         1,012,893   September 1995
         Glen Eagles                                          7,300,000        9,033,017           947,596     October 1995

         WILMINGTON, NORTH CAROLINA
         Wimbledon Chase                                      3,300,000        5,674,978         1,032,249    February 1994
         Chase Mooring                                        3,594,000        5,764,709           874,015      August 1994
         Osprey Landing                                       4,375,000        7,248,041           861,051    November 1995

         OTHER NORTH CAROLINA
         Wind Lake                                            8,760,000       11,085,542         1,313,936       April 1995
         The Meadows                                          6,200,000        7,442,434           857,142     January 1996
         Signature Place                                      5,462,948        7,258,310           675,438      August 1996
         Pinnacle Ridge                                       5,731,150        6,048,013           142,257       April 1998
-----------------------------------------------------------------------------------------------------------------------------
         GEORGIA

         ATLANTA, GEORGIA
         Ashley Run                                          18,000,000       19,482,278         1,046,144       April 1997
         Carlyle Club                                        11,580,000       12,854,800           641,638       April 1997
         Dunwoody Springs                                    15,200,000       18,224,312           827,490        July 1997
         Stone Brooke                                         7,850,000        8,711,137           328,088     October 1997
         Spring Lake                                          9,000,000        9,363,025           128,844      August 1998

</TABLE>



                                       23
<PAGE>


<TABLE>
<CAPTION>


                                                               Initial             Total       Accumulated             Date
         Description                                   Acquisition Cost      Investment*      Depreciation         Acquired
<S>                                                    <C>                  <C>               <C>              <C>         
         GEORGIA (CONTINUED)
         Other Georgia
         West Eagle Greens                                    4,020,000        6,344,127           691,426       March 1996
         Savannah West                                        9,843,620       13,289,356         1,158,056        July 1996
----------------------------------------------------------------------------------------------------------------------------
         VIRGINIA

         RICHMOND, VIRGINIA
         Ashley Park                                         12,205,000       13,147,418         1,302,148       March 1996
         Trolley Square                                      10,242,575       13,262,283         1,058,022              ***
         Hampton Glen                                        11,599,931       12,746,609         1,061,727      August 1996
         The Gables                                          11,500,000       11,804,432           180,293        July 1998

         VIRGINIA BEACH, VIRGINIA
         Mayflower Seaside                                    7,634,144       10,191,359         1,409,626     October 1993
         Harbour Club                                         5,250,000        6,246,147           923,702         May 1994
         Bay Watch Pointe                                     3,372,525        4,996,481           619,857        July 1995
         Tradewinds                                          10,200,000       11,078,865         1,220,735    November 1995
         Arbor Trace                                          5,000,000        6,022,029           568,303       March 1996

         OTHER VIRGINIA
         County Green                                         3,800,000        5,299,670         1,031,996    December 1993
         Trophy Chase                                         3,710,000        6,729,365           694,015       April 1996
         Greenbrier                                          11,099,525       12,491,834         1,532,856     October 1996
----------------------------------------------------------------------------------------------------------------------------
         SOUTH CAROLINA

         GREENVILLE, SOUTH CAROLINA
         Polo Club                                            4,300,000        7,505,936         1,770,648        June 1993
         Breckinridge                                         5,600,000        7,062,749           786,475        June 1995
         Magnolia Run                                         5,500,000        6,909,344           933,528        June 1995

         COLUMBIA, SOUTH CAROLINA
         Stone Ridge                                          3,325,000        5,814,292         1,215,180    December 1993
         The Arbors at Windsor Lake                          10,875,000       11,519,973           810,376     January 1997

         OTHER SOUTH CAROLINA
         Westchase                                           11,000,000       12,811,352           837,847     January 1997
         Hampton Pointe                                      12,225,000       14,273,203           385,775       March 1998
         Cape Landing                                        17,100,000       17,265,961           152,653     October 1998
----------------------------------------------------------------------------------------------------------------------------
                                                           $497,520,664     $587,438,358       $48,227,760
----------------------------------------------------------------------------------------------------------

</TABLE>

     *  Includes  real  estate  commissions,  closing  costs,  and  improvements
     capitalized since the date of acquisition.
     **  Heatherwood   Apartments  is  comprised  of  Heatherwood   and  Italian
     Village/Villa Marina Apartments acquired in September 1996 and August 1997,
     respectively,  at a cost of $10,205,457 and $7,425,000.  They are adjoining
     properties and are operated as one apartment community.
     *** Trolley  Square  Apartments  is  comprised  of Trolley  Square East and
     Trolley  Square West  Apartments  acquired in June 1996 and December  1996,
     respectively,  at a cost of $6,000,000  and  $4,242,575.  They are adjacent
     properties and are operated as one apartment community.



                                       24
<PAGE>



     Note 2
     Continued

     The  following is a  reconciliation  of the carrying  amount of real estate
     owned:

<TABLE>
<CAPTION>

                                                                             1998                   1997                    1996
                                                                       -------------------------------------------------------------
<S>                <C>                                                  <C>                     <C>                     <C>         
BALANCE AT JANUARY 1                                                    $487,575,196            $329,715,853            $129,696,447
Real estate purchased                                                     73,883,993             134,900,712             180,971,367
Improvements, furniture, and fixtures                                     25,979,169              22,958,631              19,048,039
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31                                                  $587,438,358            $487,575,196            $329,715,853
</TABLE>



The following is a reconciliation of accumulated depreciation:
<TABLE>
<CAPTION>

                                                                             1998                  1997                     1996    
                                                                       -------------------------------------------------------------
<S>                <C>                                                   <C>                     <C>                     <C>       
BALANCE AT JANUARY 1                                                     $27,486,630             $12,323,037             $4,254,974
Depreciation expense                                                      20,741,130              15,163,593              8,068,063
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31                                                   $48,227,760             $27,486,630             $12,323,037

</TABLE>

     Note 3 Notes Payable

     During 1997, the company  obtained a $175 million  unsecured line of credit
     ("Unsecured Line") with a consortium of six banks. During October 1998, the
     company closed a $25 million extension on the Unsecured Line,  bringing the
     maximum  permitted  borrowing to $200  million.  The  Unsecured  Line bears
     interest at one month LIBOR plus 135 basis  points at December 31, 1998 and
     1997.  In  addition,  the company is  obligated  to pay lenders a quarterly
     commitment  fee equal to .20% per annum of the unused  portion of the line.
     The $25  million  extension  is due on April  15,  1999  and the  remaining
     balance  is  due on  October  30,  2000.  At  December  31,1998  and  1997,
     borrowings  under  the  agreement  were  $196  million  and  $144  million,
     respectively.  The weighted average interest rates incurred under the lines
     of credit were 6.9% in 1998 and 7.2% in 1997.

     The line of credit agreement  contains certain covenants which, among other
     things,  require  maintenance  of certain  financial  ratios  and  includes
     restrictions  on  the  company's  ability  to  make  distributions  to  its
     shareholders over certain amounts. At December 31, 1998, the company was in
     compliance with these covenants.

     During 1997, the company obtained a $5 million unsecured line of credit for
     general corporate  purposes  ("General Purpose Line").  The general purpose
     line of credit bears  interest at LIBOR plus 160 basis points and is due on
     March  31,1999.  At  December  31,  1998 and 1997,  borrowings  under  this
     arrangement were $343,000 and $2.5 million, respectively.

     On June 25, 1996, in connection with the acquisition of rental property, an
     unsecured  note was executed by the company in the amount of $5.5  million.
     The note  bears an  effective  interest  rate of 6.65%  per  annum.  Annual
     interest payments are due on January 1, 1999 and the principal balance with
     any accrued  interest is due on June 1, 1999. The note is prepayable at any
     time, without penalty.

     The fair market value of the borrowings  approximate the recorded  amounts.
     No interest was  capitalized  in 1998,  1997,  or 1996.  Interest  paid was
     $11,636,307,   $7,221,104,   and  $1,075,360  for  1998,  1997,  and  1996,
     respectively.


     Note 4 Common Stock

     During 1998,  the company  raised $30 million by issuing 2.6 million common
     shares through its participation in a Unit Investment Trust, which resulted
     in $28 million net proceeds to the company,  after underwriting  discounts,
     commissions,  and other direct costs.  The company used the proceeds to pay
     down  its line of  credit,  for the  acquisition  of  additional  apartment
     communities, and for working capital.

     In April 1997,  the company  completed its  firm-commitment  initial public
     offering of 5,175,000  shares of its common stock at $10.50 per share.  Net
     proceeds, after deducting underwriting discounts and commissions and direct
     offering costs, aggregated approximately $49 million and were used to repay
     $44 million of a previous line of credit.


                                       25
<PAGE>


     The company  raised capital  through a series of continuous  "best-efforts"
     offerings of shares during 1996.  The company  received  gross  proceeds of
     $161,558,958 from the sale of 14,687,178 shares at $11 per share, including
     shares sold through the  reinvestment of  distributions  for the year ended
     December 31, 1996.  The  underwriter  received  selling  commissions  and a
     marketing  expense allowance equal to 7.5% and 2.5%,  respectively,  of the
     gross  proceeds  of  shares  sold.  During  1996,  the  underwriter  earned
     $16,159,634.  The net proceeds of the  offering,  after  deducting  selling
     commissions and other offering expenses, were $144,798,035 in 1996.

     The  company  provides  a  plan,  which  allows  shareholders  to  reinvest
     distributions in the purchase of additional shares of the company. In 1997,
     the  company  adopted a  Dividend  Reinvestment  and Share  Purchase  Plan,
     ("Plan"),  which allows any recordholder to reinvest  distributions without
     payment of any brokerage  commissions  or other fees. Of the total proceeds
     raised from common shares during the years ended  December 31, 1998,  1997,
     and 1996,  $10,873,529,  $14,198,868,  and $9,572,255,  respectively,  were
     provided through the reinvestment of distributions.

     As of December 31, 1998, the company has an approximately 88% interest as a
     general  partner  in  Cornerstone  REIT  Limited  Partnership.,  a Virginia
     limited partnership ( the "Limited Partnership") which was organized by the
     company to acquire Cape Landing Apartments,  a 288-unit apartment community
     located in Myrtle Beach, South Carolina. The purchase price of the property
     was $17.1  million.  The  company  entered  into an  agreement  of  limited
     partnership (the  "Agreement") with Cape Landing  Apartments,  LLC, a North
     Carolina limited liability company (the "Limited Partner"). Pursuant to the
     Agreement, the Limited Partner contributed an approximately 12% interest in
     the property to the Limited Partnership in exchange for 185,887 partnership
     units valued at $2 million. The Limited Partner sold its remaining interest
     in the property to the Limited Partnership for $15.1 million. The operating
     partnership units can be exchanged at the option of the holder. The company
     determines if the options will be converted to cash or common  stock,  at a
     ratio of one share of common stock for every operating partnership unit.


     Note 5 Benefits Plans

     Stock Incentive Plan
     Based on the outstanding  shares under the 1992 Incentive Plan, as amended,
     a maximum of 1,650,054  options could be granted,  at the discretion of the
     Board of Directors,  to certain  officers and key employees of the company.
     Also under the  Directors  Plan, as amended,  a maximum of 702,315  options
     could be granted to the  directors  of the  company.  In 1998,  the company
     granted  38,605  options to purchase  shares under the  Directors  Plan and
     460,000 options to purchase shares under the incentive plan.

     Both of the plans generally  provide,  among other things,  that options be
     granted at exercise prices not lower than the market value of the shares on
     the date of grant.  Under the Incentive Plan, options become exercisable at
     the date of grant.  Generally the optionee has up to 10 years from the date
     on which the options first become  exercisable during which to exercise the
     options.  Activity in the  company's  share  option  plans during the three
     years ended December 31, 1998 is summarized in the following table:


<TABLE>
<CAPTION>
                                                  1998                                     1997                           1996   
------------------------------------------------------------------------------------------------------------------------------------
                                                    Weighted-Average               Weighted-Average                 Weighted-Average
                                         Options     Exercise Price    Options     Exercise Price        Options      Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>               <C>        <C>               <C>   
Outstanding, beginning of year           405,491        $11.07        371,256           $10.99           292,967           $10.98
Granted                                  498,605         11.96         34,235            11.38            78,289            11.00
Exercised                                     --            --             --               --                --               --
Forfeited                                     --            --             --               --                --               --
------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year                 904,096        $11.73        405,491           $11.07           371,256           $10.99
Exercisable at end of year               904,096        $11.73        364,591           $11.07           289,456           $10.99
------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR                           $.32                           $1.00                               $.69

</TABLE>


     Pro forma  information  regarding  net  income  and  earnings  per share is
     required  by  FASB  123,  which  also  requires  that  the  information  be
     determined as if the company has  accounted for its employee  stock options
     granted  subsequent  to  December  31,  1994  under the fair  value  method
     described in that statement. The fair value for these options was estimated
     at the date of grant using a  Black-Scholes  option  pricing model with the
     following   weighted-average   assumptions   for  1998,   1997,  and  1996,
     respectively: risk-free interest rates of 5.5% for 1998, 6.7% for 1997, and
     6.4%  for  1996;  a  dividend  yield of 9.0% for 1998 and 7.0% for 1997 and
     1996;  volatility  factors of the expected  market  price of the  company's
     common  stock of .160 for  1998,  .161  for 1997 and .122 for  1996;  and a
     weighted-average expected life of the option of 10 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  have  no  vesting
     restrictions  and are fully  transferable.  In addition,  option  valuation
     models  require the input of highly  subjective  assumptions  including the
     expected  stock price  volatility.  Because the  company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options,  and  because  changes in the  subjective  input  assumptions  can
     materially  affect 


                                       26
<PAGE>


     the fair value estimate,  in management's  opinion,  the existing models do
     not necessarily  provide a reliable single measure of the fair value of its
     employee stock options.

     For purposes of FASB 123 pro forma disclosures, the estimated fair value of
     the options is amortized to expense over the options'  vesting  period.  As
     the options are immediately  exercisable,  the full impact of the pro forma
     adjustment to net income is disclosed below.


<TABLE>
<CAPTION>

                                                                          1998              1997   
                                                                      -----------------------------
<S>                                                                 <C>               <C>
         Pro forma FASB 123 net income                                $23,040,840       $19,148,373
         As reported net income                                       $23,210,642       $19,225,553
         Pro forma FASB 123 diluted earnings per common share                $.61              $.59
         As reported diluted earnings per common share                       $.62              $.59

</TABLE>



     401(K) Savings Plan
     Eligible  employees of the company  participate in a contributory  employee
     savings  plan.  Under the plan,  the  company  may  match a  percentage  of
     contributions  made by eligible  employees,  such  percentage to apply to a
     maximum of 1% of their  annual  salary.  Expenses  under this plan for 1998
     were $42,288.


     Note 6 Related-Party Transactions

     Relationship with Apple Residential Income Trust

     Apple Residential  Income Trust, Inc. ("Apple") is a real estate investment
     trust  whose  operations  began in 1997.  Mr.  Knight,  Chairman  and Chief
     Executive  Officer of the  company,  also serves as the  Chairman and Chief
     Executive  Officer of Apple.  Common  equity is being  raised by Apple on a
     "best  efforts"  basis in a manner similar to that used by the company from
     1993 through 1996.

     During  1997,  the company  purchased  417,778  common  shares of Apple for
     $3,760,000,  which represents  approximately  1.5% of Apple's common shares
     outstanding at December 31, 1998. The company has a right to purchase up to
     9.8% of the  common  shares of Apple and has a first  right of  refusal  to
     purchase   the  assets  and  business  of  Apple.   The  company   received
     distributions on this investment of $340,483 in 1998 and $253,172 in 1997.

     The company or its  affiliates  provides  real estate  brokerage,  property
     management,  and  advisory  services to Apple.  In March 1997,  the company
     purchased  the right to provide  brokerage  services to Apple by purchasing
     the assets of Apple Realty Group,  Inc., for $2 million,  $350,000 in cash,
     and 150,000 company common shares valued at $1,650,000. The principal asset
     of Apple Realty Group,  Inc. was its brokerage  contract with Apple.  Under
     the terms of the brokerage contract with Apple, the company receives a real
     estate  commission  equal to 2% of the  purchase  price  of the  properties
     acquired plus reimbursement of certain expenses.  During 1998 and 1997, the
     company earned  $2,665,100  and  $1,031,066,  respectively,  in real estate
     brokerage  commissions.  The company amortized $1,054,470 and $546,000,  in
     1998 and  1997,  respectively,  of the  purchase  price  for the  brokerage
     contract.  The company is amortizing  the purchase price of the contract in
     relationship to the assets acquired.

     The company provides property management services for Apple for a fee of 5%
     of monthly rental  revenues plus  reimbursement  of certain  expenses.  The
     company provides  advisory services to Apple for a fee of .1% to .25% based
     on total capital  raised by Apple and the financial  performance  of Apple.
     During  1998  and  1997,  the  company  earned   $2,220,593  and  $822,497,
     respectively, for management and advisory services.

     Relationship with Advisory, Management, and Acquisition Companies

     Prior to  September  30,  1996,  the  company  operated  as an  "externally
     advised" and "externally managed" REIT.  Cornerstone Advisors,  Inc. served
     as the advisor,  Cornerstone  Management Group, Inc. served as the property
     manager,  and  acquisition  services  were provided by  Cornerstone  Realty
     Group,  Inc. Glade M. Knight,  Chairman and Chief Executive  Officer of the
     company, held all of the stock of Cornerstone Advisors,  Inc.,  Cornerstone
     Management Group, Inc., and Cornerstone  Realty Group, Inc.  (collectively,
     the "External Companies").  By agreement, Mr. Knight held part of the stock
     of the  External  Companies  for the  account  and  interest  of Stanley J.
     Olander,  Jr., Chief Financial Officer of the company,  and Debra A. Jones,
     Chief Operating Officer of the company.

     As of October 1, 1996, the company  entered into a series of  related-party
     transactions  with the  External  Companies,  the  effect  of which  was to
     convert the company into a "self-administered" and "self-managed" REIT. The
     transactions  were unanimously  approved by the independent  members of the
     company's Board of Directors.



                                       27

<PAGE>

     To effect the  transaction,  the company agreed to issue 1.4 million shares
     to Cornerstone Management Group, Inc. in exchange for the assignment of all
     of its rights and interest in, to and under, its management agreements with
     the  company.  The  company  issued  700,000  shares on October  1,1996 and
     700,000 shares on September 30, 1997. The consideration for the transaction
     totaled approximately $15.4 million based upon the fair market value of $11
     per share of the company's  common stock.  Imputed interest of $402,907 and
     $134,302  were  recognized  in 1997  and  1996,  respectively,  related  to
     issuance of 700,000  shares in September  1997. In addition,  on October 1,
     1996, the company paid to Cornerstone  Realty Group,  Inc. and  Cornerstone
     Advisors,  Inc. $1,325,000 in exchange for the assignment by them of all of
     their rights and interests  in, to and under,  their  property  acquisition
     agreement and advisory  agreement with the company.  Immediately  following
     the assignment by each of the External Companies of its rights and interest
     in, to and under, its respective  agreements,  the company  terminated such
     agreements.  The  consideration  for all of the  above  transactions,  plus
     related  transaction  costs and imputed  interest,  was  accounted for as a
     termination of the management administration contracts.

     Also on October 1, 1996, the company paid to Cornerstone Realty Group, Inc.
     $100,000  and paid to Glade Knight  $350,000 for the personal  property and
     building, respectively,  located at 306 E. Main Street, Richmond, Virginia,
     which serves as the principal executive office of the company.  The company
     also paid  approximately  $138,000  to certain  lenders,  representing  the
     balance owed on certain automobile loans, in exchange for the conveyance by
     Cornerstone Realty Group, Inc., to the company of such automobiles.

     Prior to the October 1, 1996 transaction,  Cornerstone Advisors,  Inc. (The
     "Advisor")  was the  advisor to the  company and  provided  its  day-to-day
     management.  The Advisor  earned a quarterly  fee not to exceed .25% of the
     company's assets based on the company's financial performance as defined in
     the agreement with the Advisor. The Advisor earned $295,759 in 1996.

     As properties were acquired, the company paid real estate commissions of 2%
     of the purchase prices of properties to Cornerstone Realty Group, Inc., and
     Cornerstone Realty Group, Inc. earned commissions of $1,957,624 in 1996. In
     addition the company entered into agreements  with  Cornerstone  Management
     Group,  Inc.  (the  "Management  Company")  to manage the  properties.  The
     Management Company earned a management fee equal to 5% of rental income and
     was entitled to be reimbursed for certain expenses.  The Management Company
     earned management fees of $1,243,215 in 1996.

     Other Relationships
     Leslie A. Grandis, a director of the company, is also a partner in McGuire,
     Woods, Battle & Boothe LLP, which serves as counsel to the company.  Martin
     Zuckerbrod and Harry S. Taubenfeld,  directors of the company, provide real
     estate legal services to the company.


     Note 7 Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings per share:

<TABLE>
<CAPTION>
                                                                                 1998                 1997                 1996  
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                  <C>                  <C>
Numerator:
Net income (loss)                                                             $23,210,642          $19,225,553          $(4,169,849)
  Numerator for basic and diluted earnings per
     share-income available to common stockholders
     after assumed conversions                                                 23,210,642           19,225,553           (4,169,849)
Denominator:
   Denominator for basic earnings per
     share-weighted-average shares                                             37,630,546           32,617,823           20,210,432
Effect of dilutive securities:
   Stock options                                                                   20,402                2,014                   -- 
------------------------------------------------------------------------------------------------------------------------------------
   Denominator for diluted earnings per share-adjusted
     weighted-average shares and assumed conversions                           37,650,948           32,619,837           20,210,432
------------------------------------------------------------------------------------------------------------------------------------

   Basic and diluted earnings (loss) per common share                                $.62                 $.59                $(.21)
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>




                                       28


<PAGE>



     Note 8 Quarterly Financial Data (Unaudited)

     The following is a summary of quarterly results of operations for the years
     ended  December  31, 1998 and 1997:  






<TABLE>
<CAPTION>
                                                             First              Second              Third                 Fourth 
1998                                                        Quarter             Quarter            Quarter                Quarter
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>                 <C>                 <C>                    <C>        
Revenues                                                  $20,962,469         $22,721,906         $24,999,279            $24,954,294
Income before
   interest income (expense)                                7,963,956           8,572,162           9,405,990              9,459,167
Net income                                                  5,236,048           5,512,931           6,289,373              6,172,290
Basic and diluted earnings per
   common share                                                   .15                 .15                 .16                    .16
Distributions per share
                                                                  .25                 .26                 .26                   .26
<CAPTION>

1997(a)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                 <C>                    <C>        
Revenues                                                  $15,385,285         $17,354,804         $18,967,143            $20,263,392
Income before
   interest income (expense)                                5,592,743           6,005,325           6,900,266              7,957,424
Net income                                                  4,001,740           4,529,304           5,336,846              5,357,663
Basic and diluted earnings
   per common share                                               .14                 .14                 .15                    .15
Distributions per share                                           .25                 .25                 .25                    .25


</TABLE>

     (a)  Included  in the 1997  operating  results is  $402,907  of  management
          contract  termination expense resulting from the company's  conversion
          to  "self-administered"  and "self-managed"  status. See Note 6 to the
          consolidated financial statements.


     Note 9 Pro Forma Information (Unaudited)

     The following  unaudited pro forma  information for the year ended December
     31,  1997  reflects  adjustments  for the actual  rental  income and rental
     expenses of 11 of the 13  properties  acquired  in 1997 for the  respective
     periods in 1997 prior to  acquisition  by the company.  The  unaudited  pro
     forma  information  is presented  as if (a) the company had  qualified as a
     REIT,  distributed  all of its taxable income and,  therefore,  incurred no
     federal income tax expense during the period;  and (b) the company had used
     proceeds  from its best  efforts  offering to acquire the  properties,  for
     properties  acquired  before the  completion  of the  offering.  Properties
     acquired  after the  completion of the offering were assumed to be acquired
     using the company's  line of credit or from proceeds of an equity  offering
     completed  in April  1997.  The pro forma  information  does not purport to
     represent what the company's  results of operations would have been if such
     transactions, in fact, had occurred on January 1, 1997, nor does it purport
     to represent the results of operations for future periods.

     Unaudited Pro Forma Totals                                1997
                                                               ----

     Income                                                $80,147,371
     Net income                                             20,342,399
     Basic and diluted earnings per common share                   .58

     Net income has been  adjusted as  follows:  (1)  interest  expense has been
     increased for the  properties  funded by the company's line of credit based
     on market  rates at the time of  acquisition  available  to the company for
     applicable  properties;  (2) the number of weighted  average  common shares
     outstanding  was  increased for  properties  funded by proceeds from equity
     offerings;  and (3)  depreciation  has been adjusted based on the company's
     basis in the properties.

     The 1998 acquisitions were not material to require pro forma disclosure.

     Note 10 Subsequent Events (Unaudited)

     The  Company's  Board of  Directors  met on March  30,  1999,  and voted to
     approve a merger with Apple  Residential  Income  Trust,  Inc.  subject to,
     among  other   requirements,   an   affirmative   vote  of  the   Company's
     shareholders.

     Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
     Financial Disclosure.


     None.






                                       29
<PAGE>



                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

Ownership of Equity Securities

"Beneficial Ownership" as used herein has been determined in accordance with the
rules and regulations of the Securities and Exchange Commission and is not to be
construed  as  an  admission  that  any  of  such  Common  Shares  are  in  fact
beneficially  owned  by  any  person.  As of  the  Record  Date,  there  are  no
shareholders  known to the  Company  who own  beneficially  more  than 5% of the
outstanding Common Shares.

Beneficial  Ownership of Common Shares held by directors and executive  officers
of the  Company as of the Record  Date is  indicated  in the table  below.  Each
person  named in the table and included in the  director/officer  group has sole
voting and  investment  powers as to such Common  Shares,  or shares such powers
with his or her spouse or minor children, if any.

<TABLE>
<CAPTION>
                                                                             Number of   
                                                                           Common Shares 
                                                                           Beneficially  
                           Name                                                Owned(1)          Percent of Class
                           ----                                            -------------         ----------------
<S>                                                                                <C>               <C> 
Glenn W. Bunting, Jr......................................                         27,762               *

Leslie A. Grandis.........................................                         27,820               *

Glade M. Knight...........................................                      1,650,096             4.22%

Penelope Ward Kyle........................................                         27,800               *

Stanley J. Olander, Jr....................................                        260,901               *

Harry S. Taubenfeld.......................................                         67,307               *

Martin Zuckerbrod.........................................                         66,319               *

Debra A. Jones............................................                        259,901               *

All directors and executive officers as a group...........                      2,387,906             6.11%

</TABLE>


-----------------------
   * Less than one percent of outstanding Common Shares.

(1)  Includes  Common  Shares  that may be acquired  upon the  exercise of stock
     options,  as  follows:  Messrs.  Bunting  and Grandis and Ms. Kyle - 26,329
     Common Shares each; Mr. Knight -280,440 Common Shares;  Mr. Olander and Ms.
     Jones - 144,310 Common Shares each; and Messrs. Taubenfeld and Zuckerbrod -
     52,413 Common Shares each.

Election of Directors

Nominees for Directors. At the Annual Meeting three directors of Class II are to
be elected,  each to hold office for an ensuing three-year term, or until his or
her  successor  is duly  elected  and  qualified,  except in the event of death,
resignation or removal.  The nominees for election to the three positions on the
Board of Directors  to be voted upon at the Annual  Meeting are Glade M. Knight,
Glenn W. Bunting and Leslie A. Grandis. If elected,  Messrs. Knight, Bunting and
Grandis will serve until the Annual Meeting of Shareholders in the year 2002.

Of the  directors  whose  terms do not  expire  in  1999,  Messrs.  Olander  and
Zuckerbrod  (the Class I directors)  will serve until the 2000 Annual Meeting of
Shareholders,  and Ms. Kyle and Mr.  Taubenfeld will serve until the 2001 Annual
Meeting of Shareholders.

Unless  otherwise  specified,  Common Shares  represented by the proxies will be
voted for the election of the nominees  listed,  except that in the event either
of those named should not continue to be available for  election,  discretionary
authority  may be  exercised  to vote for a  substitute.  No  circumstances  are
presently known that would render any nominee named herein 



                                       30
<PAGE>

unavailable.  Each of the nominees is now a member of the Board of Directors. If
a quorum  is  present,  the two  candidates  receiving  the  greatest  number of
affirmative votes of Common Shares  represented and voting at the Annual Meeting
will be elected directors of the Company.

The nominees, their ages, the year of election of each to the Board of Directors
of the Company,  their principal occupations during the past five years or more,
and  directorships of each in public companies in addition to the Company are as
follows:

Glenn W. Bunting,  Jr., 54, is a director of the Company.  He has been President
of American KB Properties,  Inc., which develops and manages  shopping  centers,
since 1985.  He has been  President of G.B.  Realty  Corporation,  which brokers
shopping  centers and apartment  communities,  since 1980. Mr. Bunting was first
elected to the Board of the Company in 1993 and his term expires in 1999.

Leslie A.  Grandis,  54, is a director of the Company.  He has been a partner in
the law firm of McGuire, Woods, Battle & Boothe LLP in Richmond,  Virginia since
1974. Mr. Grandis  concentrates  his practice in the areas of corporate  finance
and  securities  law.  He is a  director  of  Markel  Corporation  and CSX Trade
Receivables  Corporation.  Mr.  Grandis  was first  elected  to the Board of the
Company in 1993 and his term expires in 1999.

Glade M.  Knight,  55, is a  director,  Chairman,  Chief  Executive  Officer and
President of the  Company.  Since 1972,  Mr.  Knight has held  executive  and/or
ownership  positions in several  corporations  involved in the management of and
investment in real estate, and has served, directly or indirectly,  as a general
or limited partner of 71 limited  partnerships  owning 80 properties  comprising
over 13,000  apartment  units.  Mr.  Knight is also a director,  Chairman of the
Board and President of Apple Residential Income Trust, Inc. Mr. Knight was first
elected to the Board of the  Company in 1989 and his term  expires in 1999.  Mr.
Knight serves as Chief  Executive  Officer and President of the Company under an
employment  agreement  which has a one-year term ending on August 31, 1999,  and
which may be extended by the Company for up to two additional one-year terms.

Other  Directors  and  Officers.  The following are the directors of the Company
whose terms expire after 1999 and the executive officers of the Company:

Debra A. Jones,  44, is the Chief  Operating  Officer of the Company.  From June
1991 through August 1996,  Ms. Jones was employed by  Cornerstone  Realty Group,
Inc. Through Cornerstone Realty Group, Inc.,  Cornerstone Management Group, Inc.
and Cornerstone  Advisors,  Inc., which had contracts to provide  management and
administration  services to the  Company,  Ms.  Jones  provided the same general
types of services as she now provides as the Company's Chief Operating  Officer.
Ms. Jones has held executive positions in real estate companies organized by Mr.
Knight since 1979.  Ms. Jones has been the  Company's  Chief  Operating  Officer
since  September  1,  1996,  and  serves in such  capacity  under an  employment
agreement which has a five-year term ending on August 31, 2001.

Stanley  J.  Olander,  Jr.,  44, is a  director,  Chief  Financial  Officer  and
Secretary of the Company.  From June 1991 through  August 1996,  Mr. Olander was
employed by Cornerstone  Realty Group,  Inc. Through  Cornerstone  Realty Group,
Inc., Cornerstone  Management Group, Inc. and Cornerstone Advisors,  Inc., which
had contracts to provide management and administration  services to the Company,
Mr.  Olander  provided the same general  types of services as he now provides as
the Company's Chief Financial  Officer.  Mr. Olander has held various  executive
positions  in real estate  companies  organized by Mr.  Knight  since 1981.  Mr.
Olander  was  first  elected  to the Board of the  Company  in 1992 and his term
expires in 2000.  Mr.  Olander has been the Company's  Chief  Financial  Officer
since  September  1,  1996,  and  serves in such  capacity  under an  employment
agreement which has a five-year term ending on August 31, 2001.

Martin Zuckerbrod,  68, is a director of the Company.  He has practiced law, and
been involved in mortgage and real estate investment activities,  in the firm of
Zuckerbrod & Taubenfeld of Cedarhurst, New York since 1959. He has practiced law
since 1956. Mr. Zuckerbrod's areas of professional concentration are real estate
and  commercial  law.  Mr.  Zuckerbrod  also serves as a judge in the Village of
Cedarhurst,  New York.  Mr.  Zuckerbrod  was first  elected  to the Board of the
Company in 1992 and his term expires in 2000.

Penelope  W. Kyle,  51, has been the  director  of the  Virginia  Lottery  since
September 1, 1994. Ms. Kyle worked in various capacities for CSX Corporation and
its  affiliated  companies  from 1981  until  August  1994.  She  served as Vice
President, Administration and Finance for CSX Realty, Inc. beginning in 1991, as
Vice President,  Administration  for CSX Realty,  Inc. from 1989 to 1991, and as
Assistant  Vice  President and  Assistant to the President for CSX Realty,  Inc.
from 1987 to 1989.  Ms.  Kyle is also a  director  of Apple  Residential  Income
Trust,  Inc. Ms. Kyle was first  elected to the Board of the Company in 1993 and
her term expires in 2001.

Harry S.  Taubenfeld,  69, has practiced  law, and been involved in mortgage and
real estate  investment  activities,  in the firm of  Zuckerbrod & Taubenfeld of
Cedarhurst,  New  York  since  1959,  and has  practiced  law  since  1956.  Mr.
Taubenfeld  specializes in real estate and commercial  law. Mr.  Taubenfeld is a
Trustee of the Village of  Cedarhurst,  New York,  and a past  President  of the
Nassau County Village  Officials.  Mr. Taubenfeld was first elected to the Board
of the Company in 1992 and his term expires in 2001.



                                       31
<PAGE>


Executive Officers

The Company's executive officers are Glade M. Knight, Debra A. Jones and Stanley
J. Olander,  Jr.  Information with regard to Messrs.  Knight and Olander and Ms.
Jones is set forth above under the caption "Election of Directors."

Item 11. Executive Compensation

Compensation of Directors

During 1998,  independent directors (all directors other than Messrs. Knight and
Olander)  received annual  directors' fees of $10,000 payable $5,000 in cash and
$5,000 in Common  Shares  (valued  at the  current  market  price at the time of
issuance),  plus $500 for each meeting of the Board and $100 for each  committee
meeting attended; however independent directors did not receive any compensation
for attending a committee meeting if it occurred on the same day as a meeting of
the entire Board of  Directors.  Independent  directors  received an  additional
$1,000 for serving on the Executive Committee in 1998. Non-independent directors
received no  compensation  from the Company for their service as directors.  All
directors   were   reimbursed   by  the  Company  for  their  travel  and  other
out-of-pocket  expenses  incurred in  attending  meetings of the  directors or a
committee and in conducting the business of the Company.

In addition,  in 1998, each independent  director received an option to purchase
7,721  Common  Shares,   exercisable  at  $11.68per  Common  Share.  Independent
directors will receive additional Common Share options in 1999.

Compensation of Executive Officers

General.  The following  table sets forth the  compensation  awarded  during the
fiscal years ended  December 31, 1998,  1997 and 1996,  to the  Company's  Chief
Executive  Officer and all executive  officers of the Company whose total salary
and bonus exceeded $100,000 (collectively the "Named Executive Officers") during
the fiscal year ending  December 31,  1998.  The Company did not pay salaries to
its officers for the period before September 1, 1996.  During such prior period,
the Company operated as an "externally-advised"  and  "externally-managed"  real
estate  investment  trust  ("REIT").  Effective  October  1, 1996,  the  Company
converted to "self-administered" and "self-managed" status.

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE



                                     ANNUAL COMPENSATION                                       LONG-TERM COMPENSATION AWARDS
                                     -------------------                                       -----------------------------

                                                                             
        NAME AND                                                                                                     SECURITIES
        --------                                                            OTHER ANNUAL        RESTRICTED SHARE     UNDERLYING
   PRINCIPAL POSITION        YEAR     SALARY ($)      BONUS ($)(1)         COMPENSATION (2)       AWARDS  ($)(3)     OPTIONS (#)
   ------------------        ----     ----------      ------------         ----------------       --------------     -----------
<S>                          <C>       <C>            <C>                    <C>                   <C>               <C>        
Glade M. Knight              1998      210,000            ---                    ---                  19,082                 ---
  Chairman and Chief         1997      210,000            ---                    ---                  11,000                 ---
  Executive Officer          1996       70,000            ---                    ---                  11,000                 ---


Debra A. Jones               1998      120,000            ---                    ---                  10,325                 ---
  Chief Operating Officer    1997      120,000            ---                    ---                   5,500                 ---
                             1996       40,000            ---                    ---                   5,500                 ---


Stanley J. Olander, Jr.      1998      120,000            ---                    ---                  10,325                 ---
  Chief Financial Officer    1997      120,000            ---                    ---                   5,500                 ---
                             1996       40,000            ---                    ---                   5,500                 ---
</TABLE>

----------------------

(1)  Bonuses may be awarded in 1999 and in future years in the discretion of the
     Board of Directors.

(2)  The Company  provides  each of the Named  Executive  Officers with use of a
     Company automobile,  and pays premiums for term life, disability and health
     insurance  for the Named  Executive  Officers.  The value of such items was
     less than the lesser of either $50,000 or 10% of the total salary and bonus
     of the Named Executive Officer in 1998.



                                       32
<PAGE>


(3)  At December 31, 1998, Mr. Knight held 8,350 restricted  Common Shares (with
     an  aggregate  value as of December  31, 1998 of $87,675)  issued under the
     Company's  Incentive  Plan and each of Ms. Jones and Mr. Olander held 4,500
     restricted  Common Shares (each with an aggregate  value as of December 31,
     1998 of $47,250) issued under the Incentive  Plan. All of these  restricted
     Common  Shares  were  issued on July 1, 1995 and March 24, 1998 and vest in
     equal 1/5 portions in each of the five years from the date of issuance.  If
     the holder of such restricted  Common Shares ceases to be either an officer
     or employee of the  Company  for any reason  other than death or  permanent
     disability,  the  unvested  restricted  Common  Shares  will  revert to the
     Company.  Distributions  are  payable  on all of  these  restricted  Common
     Shares, both vested and unvested.  The table set forth above shows only the
     vested  restricted  Common Shares and reflects the fair market value of the
     vested restricted Common Shares on the date of their issuance.

The  following  table sets forth  information  with  respect to the Common Share
options held by the Named Executive  Officers during the year ended December 31,
1998.  There were no option grants to the Named  Executive  Officers  during the
year ended December 31, 1998.


<TABLE>
<CAPTION>



                                        AGGREGATED OPTION EXERCISES IN 1998
                                          AND 1998 YEAR-END OPTION VALUES



                           SHARES ACQUIRED   VALUE      NUMBER OF SECURITIES UNDERLYING    VALUE OF UNEXERCISED IN-THE-MONEY
          NAME               ON EXERCISE     REALIZED   UNEXERCISED OPTIONS AT YEAR-END         OPTIONS AT YEAR END ( $)
          ----               -----------     --------   -------------------------------         ------------------------

                                                        EXERCISABLE      UNEXERCISABLE    EXERCISABLE(1)    UNEXERCISABLE(1)
                                                        -----------      -------------    --------------    ----------------

<S>                            <C>             <C>         <C>            <C>             <C>               <C>              
Glade M. Knight...........      ---            ---         280,440            ---              ---                ---

Debra A. Jones............      ---            ---         144,310            ---              ---                ---

Stanley J. Olander, Jr. ..      ---            ---         144,310            ---              ---                ---
</TABLE>

    ---------------------------
<TABLE>
<CAPTION>

(1)           NAME                  GRANT DATE                OPTION                  EXERCISE PRICE*
              ----                  ----------                ------                  ---------------
   
<S>                                   <C>                     <C>                       <C>   
     Glade M. Knight                  9/08/98                   13,088                    $11.12
                                      3/24/98                  200,000                    $12.06
                                      9/08/97                   13,088                    $12.13
                                     All Prior                  54,264                    $11.00

     Debra A. Jones                   9/08/98                    7,362                    $11.12
             and                      3/24/98                  100,000                    $12.06
     Stanley J. Olander, Jr.          9/08/97                    7,362                    $12.13
                                     All Prior                  29,586                    $11.00

</TABLE>

     --------------------------

        * The fair market value based on closing sale price of Common  Shares on
date of grant.

Employment  Agreements.  Each of Glade M. Knight,  Stanley J.  Olander,  Jr. and
Debra A. Jones has,  effective  September 1, 1996,  entered  into an  employment
agreement with the Company.  Mr. Knight's employment agreement had a term of one
year, was extended for one  additional  one-year term and may be extended by the
Company for up to three  additional  one-year terms.  The employment  agreements
with Ms.  Jones and Mr.  Olander have five year terms ending on August 31, 2001.
Mr.  Olander and Ms. Jones are obligated to devote all of their business time to
the Company. Mr. Knight is not similarly  restricted,  although he has agreed to
devote as much of his  attention  and energies to the business of the Company as
is reasonably required in the judgment of him and the Board of Directors.

Each employment agreement contains a limited non-compete provision.  The officer
agrees  that during the term of his or her  employment,  and for a period of one
year thereafter if the officer  terminates his or her  employment,  such officer
will not be employed by or  affiliated  with a business  that  competes with the
Company in Virginia, North Carolina, or South Carolina, or solicit or attempt to
solicit  any  person  employed  by the  Company  to leave  such  employment  for
employment with a competing business.  Notwithstanding the foregoing, Mr. Knight
will be  permitted  (1) to continue to act as a general  partner of various real
estate  partnerships  in which he was a general partner as of September 1, 1996,
and (2) to pursue  other  ventures,  including  without  limitation  real estate
ventures,  except any such  ventures  that compete with the Company in Virginia,
North Carolina or South Carolina.

                                       33
<PAGE>


Each employment agreement terminates automatically upon the officer's death. The
Company is obligated to pay to the decedent's personal  representative an amount
equal to the decedent's current annual salary in a one-time lump sum payment.

The Company may terminate the officer's employment and the Company's obligations
under the employment  agreement in the event of the  "disability" of the officer
or for "cause," as defined in the  agreement.  "Disability"  means  inability to
perform the essential functions of the position,  after reasonable accommodation
in accordance  with the Americans  with  Disabilities  Act, if such a disability
results from a physical or mental  impairment which can be expected to result in
death or to  continue  for at least  six  consecutive  months.  In the  event of
termination   for   disability,   the  Company  must  pay  the  officer  or  his
representative  an amount  equal to the  officer's  current  annual  salary in a
one-time  lump sum payment.  "Cause" is defined in the  employment  agreement as
including  continued or deliberate neglect of duties,  willful misconduct of the
officer  injurious to the  Company,  violation of any code or standard of ethics
applicable to Company employees, active disloyalty to the Company, conviction of
a felony, habitual drunkenness or drug abuse, excessive absenteeism unrelated to
a  disability,  or breach by the  officer of the  employment  agreement.  If the
Company  terminates the officer for "cause," it will have no further  obligation
to the officer except under any applicable benefits policy.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information on security ownership of certain beneficial owners and management is
included in Item 10.

Item 13.  Certain Relationships and Related Transactions

Messrs. Zuckerbrod and Taubenfeld are principals in the law firm of Zuckerbrod &
Taubenfeld  of  Cedarhurst,  New York,  which acted as counsel to the Company in
connection  with the Company's  acquisition of certain of its real properties in
1998 and received legal fees totaling approximately  $118,000.  This law firm is
expected to render  additional  services to the Company in 1999 and will receive
compensation for such services.

Mr. Grandis, who is a director of the Company, is also a partner in the law firm
of McGuire,  Woods,  Battle & Boothe LLP, which serves as general counsel to the
Company and certain of its  affiliates and received legal fees for its services.
Such  representation is expected to continue in 1999. The husband of Penelope W.
Kyle,  who is a director of the  Company,  is also a partner in McGuire,  Woods,
Battle & Boothe LLP.


                                       34

<PAGE>



                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a) Documents filed as part of the report

             1.  Financial Statements

             The following  consolidated  financial statements of the registrant
             are included in Item 8:

                         Independent Auditors' Report
                             Ernst & Young LLP

                         Consolidated Balance Sheets
                             December 31, 1998 and 1997

                         Consolidated Statements of Operations
                             Years Ended December 31, 1998, 1997 and 1996

                         Consolidated Statements of Shareholders' Equity
                             Years ended December 31, 1998, 1997 and 1996

                         Consolidated Statements of Cash Flows
                             Years ended December 31, 1998, 1997 and 1996

                          Notes to Consolidated Financial Statements

             2.  Financial Statement Schedule

                           Schedule   III  -   Real   Estate   and   Accumulated
                           Depreciation (Included on pages 36 through 40 of this
                           Form 10-K Report)

             All other financial  statement  schedules have been omitted because
             they are not  applicable  or not  required or because the  required
             information  is included  elsewhere in the financial  statements or
             notes thereto.

             3.  Exhibits

             Incorporated  herein by  reference  are the  exhibits  listed under
                   "Exhibits  Index"  on pages 42  through  46 of this Form 10-K
                   Report.

     (b) Reports on Form 8-K

                  During  the  last  quarter  of 1998,  the  Company  filed  the
                  following Current Reports on Form 8-K:

                  On October 26,  1998,  the  registrant  filed a Report on Form
                  8-K/A to a Report on Form 8-K dated August 12, 1998.  The item
                  reported was Item 7.

                  On December 28, 1998,  the  registrant  filed a Report on Form
                  8-K dated October 16, 1998.  The items  reported were Items 2,
                  5, and 7. The  financial  statement  filed was a Statement  of
                  Income and Direct  Operating  Expenses  (exclusive  of certain
                  items) for Cape Landing Apartments for the twelve months ended
                  September 30, 1998.



                                       35


<PAGE>


SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
DECEMBER

                                                       Subsequently
                                   Initial Cost        Capitalized
                      Encum-   -------------------------------------------------
  Description         brances   Land         Bldg.         Impr.        Land
--------------------------------------------------------------------------------
1) Polo Club             $-   $  264,698   $4,035,302   $3,205,936   $  264,698
* Greenville, SC
* Multi-family housing

2) The Hollows           $-   $1,374,840   $2,825,160   $1,973,553   $1,390,671
* Raleigh, NC
* Multi-family housing   $-

3) Mayflower Seaside          $2,258,169   $5,375,975   $2,557,214   $2,258,248
* Virginia Beach, VA
* Multi-family housing
* Retail shops

4) Stone  Ridge          $-   $  374,271   $2,950,729   $2,489,292   $  374,293
* Columbia, SC
* Multi-family housing

5) County Green          $-   $  319,250   $3,480,750   $1,499,670   $  327,484
* Lynchburg, VA
* Multi-family housing

6) Wimbledon Chase       $-   $  304,590   $2,995,410   $2,374,978   $  304,815
* Wilmington, NC
* Multi-family housing

7) Harbour Club          $-   $1,019,895   $4,230,105   $  996,147   $1,020,274
* Virginia Beach, VA
* Multi-family housing

8) Chase Mooring         $-   $  258,126   $3,335,874   $2,170,709   $  258,209
* Wilmington, NC
* Multi-family housing

9) The Trestles          $-   $2,650,884   $7,699,116   $1,148,537   $2,686,006
* Raleigh, NC
* Multi-family housing

10) Wind Lake            $-   $1,051,200   $7,708,800   $2,325,542   $1,088,780
* Greensboro, NC
* Multi-family housing

11) Magnolia Run         $-   $  495,000   $5,005,000   $1,409,344   $  509,001
* Greenville, SC
* Multi-family housing

12) Breckinridge         $-   $1,512,000   $4,088,000   $1,462,749   $1,558,060
* Greenville, SC
* Multi-family housing

<PAGE>

     Gross Amount Carried
-----------------------------                 Date of      Date
   Bldg. & Impr.     Total     Acc. Dep.      Const.     Acquired      Dep. Life
--------------------------------------------------------------------------------
   $ 7,241,238    $ 7,505,936   $ 1,770,648   1972     June 3, 1993    27.5 yrs.




   $ 4,782,882    $ 6,173,553   $ 1,083,582   1974     June 1, 1993    27.5 yrs.




   $ 7,933,111    $10,191,359   $ 1,409,626   1950     Oct. 26, 1993   27.5 yrs.





   $ 5,439,998    $ 5,814,292   $ 1,215,180   1975     Dec. 8, 1993    27.5 yrs.



   $ 4,972,186    $ 5,299,670   $ 1,031,996   1976     Dec. 1, 1993    27.5 yrs.




   $ 5,370,163    $ 5,674,978   $ 1,032,249   1976     Feb. 1, 1994    27.5 yrs.




   $ 5,225,874    $ 6,246,147   $   923,702   1988      May 1, 1994    27.5 yrs.




   $ 5,506,501    $ 5,764,709   $   874,015   1968      Aug. 1, 1994   27.5 yrs.




   $ 8,812,531    $11,498,537   $ 1,518,361   1987      Dec. 30, 1994  27.5 yrs.




   $ 9,996,762    $11,085,542   $ 1,313,936   1985      April 1, 1995  27.5 yrs.




   $ 6,400,343    $ 6,909,344   $   933,528   1972     June 1, 1995    27.5 yrs.



   $ 5,504,689    $ 7,062,749   $   786,475   1973     June 21, 1995   27.5 yrs.

<PAGE>
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)

                                                       Subsequently
                                    Initial Cost        Capitalized
                      Encum-   -------------------------------------------------
  Description         brances    Land         Bldg.         Impr.        Land
--------------------------------------------------------------------------------
13) Bay Watch Pointe     $-   $  775,680   $ 2,596,845   $1,623,956   $  813,936
* Virginia Beach, VA
* Multi-family housing

14) Hanover Landing      $-   $  801,500   $ 4,923,500   $1,724,266   $  822,285
* Charlotte, NC
* Multi-family housing

15) Mill Creek           $-   $1,368,000   $ 7,182,000   $1,034,482   $1,417,614
* Winston-Salem, NC
* Multi-family housing

16) Glen Eagles          $-   $1,095,000   $ 6,205,000   $1,733,017   $1,595,458
* Winston-Salem, NC
* Multi-family housing

17) Sailboat Bay         $-   $2,002,000   $ 7,098,000   $4,364,303   $2,066,930
* Charlotte, NC
* Multi-family housing

18) Tradewinds           $-   $1,428,000   $ 8,772,000   $  878,865   $1,436,890
* Hampton, VA
* Multi-family housing

19) Osprey Landing       $-   $  393,750   $ 3,981,250   $2,873,041   $  403,842
* Wilmington, NC
* Multi-family housing

20) The Meadows          $-   $  186,000   $ 6,014,000   $1,242,434   $  190,568
* Asheville, NC
* Multi-family housing

21) West Eagle Green     $-   $  326,400   $ 3,693,600   $2,324,127   $  316,095
* Augusta, GA
* Multi-family housing

22) Ashley Park          $-   $1,586,650   $10,618,350   $  942,418   $1,589,251
* Richmond, vA
* Multi-family housing

23) Arbor Trace          $-   $1,100,000   $ 3,900,000   $1,022,029   $1,130,749
* Virginia Beach, VA
* Multi-family housing

24) Bridgetown Bay       $-   $  603,000   $ 4,422,000   $  820,929   $  624,169
* Charlotte, NC
* Multi-family housing


<PAGE>

     Gross Amount Carried
-----------------------------                 Date of      Date
   Bldg. & Impr.     Total     Acc. Dep.      Const.     Acquired      Dep. Life
--------------------------------------------------------------------------------
$ 4,182,544       $ 4,996,481   $   619,857   1972     July 18, 1995   27.5 yrs.



$ 6,626,980       $ 7,449,266   $   825,849   1972     Aug. 22, 1995   27.5 yrs.



$ 8,166,868       $ 9,584,482   $ 1,012,893   1984     Sept. 1, 1995   27.5 yrs.



$ 7,437,558       $ 9,033,017   $   947,596   1990     Oct. 1, 1995    27.5 yrs.



$11,397,373       $13,464,303   $ 1,414,467   1972     Nov. 1, 1995    27.5 yrs.



$ 9,641,975       $11,078,865   $ 1,220,735   1988     Nov. 1, 1995    27.5 yrs.



$ 6,844,199       $ 7,248,041   $   861,051   1973     Nov. 1, 1995    27.5 yrs.



$ 7,251,866       $ 7,442,434   $   857,142   1974     Jan. 31, 1996   27.5 yrs.



$ 6,028,032       $ 6,344,127   $   691,426   1974   March 1, 1996     27.5 yrs.



$11,558,167       $13,147,418   $ 1,302,148   1988   March 1, 1996     27.5 yrs.



$ 4,891,281       $ 6,022,029   $   568,303   1985   March 1, 1996     27.5 yrs.



$ 5,221,760       $ 5,845,929   $   565,523   1986   April 1, 1996     27.5 yrs.




<PAGE>

REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)

                                                       Subsequently
                                    Initial Cost        Capitalized
                      Encum-   -------------------------------------------------
  Description         brances    Land         Bldg.         Impr.        Land
--------------------------------------------------------------------------------
25) Trophy Chase         $-   $  853,300  $ 2,856,700   $3,019,365   $   880,843
* Charlottesville, VA
* Multi-family housing

26) Beacon Hill          $-   $3,121,587  $10,457,616   $1,116,410   $ 3,075,732
* Charlotte, NC
* Multi-family housing

27) Summerwalk           $-   $1,528,200  $ 4,131,800   $1,878,671   $ 1,565,051
* Concord, NC
* Multi-family housing

28) The Landing          $-   $1,001,400  $ 7,343,600   $1,710,764   $ 1,023,951
* Raleigh, NC
* Multi-family housing

29) Meadowcreek          $-   $1,110,000  $ 9,990,000   $1,404,352   $ 1,134,435
* Pineville, NC
* Multi-family housing

30) Trolley Square East  $-   $1,620,000  $ 4,380,000   $3,019,708   $ 2,817,605
Trolley Square West           $1,145,495  $ 3,097,080
* Richmond, VA
* Multi-family housing

31) Savannah West        $-   $  627,860  $ 9,215,760   $3,445,736   $ 1,161,511
* Augusta, GA
* Multi-family housing

32) Paces Glen           $-   $2,153,250  $ 5,271,750   $  704,400   $ 2,226,399
* Charlotte, NC
* Multi-family housing

33) Signature Place      $-   $  491,665  $ 4,971,283   $1,795,362   $   502,648
* Greenville, NC
* Multi-family housing

34) Hampton Glen         $-   $1,391,992  $10,207,939   $1,146,678   $ 1,414,237
* Richmond, VA
* Multi-family housing

35) Heatherwood          $-   $2,449,310  $ 7,756,147   $5,767,240   $ 4,186,842
Italian Village/Villa Marina  $ 1,707,750 $ 5,717,250
* Charlotte, NC
* Multi-family housing

<PAGE>


     Gross Amount Carried
-----------------------------                 Date of      Date
   Bldg. & Impr.     Total     Acc. Dep.      Const.     Acquired      Dep. Life
--------------------------------------------------------------------------------
$ 5,848,522       $ 6,729,365   $   694,015   1970     April 1, 1996   27.5 yrs.



$11,619,880       $14,695,613   $ 1,176,300   1985     May 1, 1996     27.5 yrs.



$ 5,973,619       $ 7,538,671   $   622,468   1983     May 1, 1996     27.5 yrs.



$ 9,031,813       $10,055,764   $   910,146   1984     May 1, 1996     27.5 yrs.



$11,369,917       $12,504,352   $ 1,170,665   1984     May 31, 1996    27.5 yrs.



$10,444,677       $13,262,283   $ 1,058,022   1968     June 25, 1996   27.5 yrs.
                                              1964     Dec. 31, 1996   27.5 yrs.



$12,127,845       $13,289,356   $ 1,158,056   1976     July 1, 1996    27.5 yrs.



$ 5,903,002       $ 8,129,400   $   554,771   1986     July 19, 1996   27.5 yrs.



$ 6,755,662       $ 7,258,310   $   675,438   1981     August 1, 1996  27.5 yrs.



$11,332,372       $12,746,609   $ 1,061,727   1986     August 1, 1996  27.5 yrs.



$19,210,856       $23,397,697   $ 1,312,815   1980     Sept. 1, 1996   27.5 yrs.
                                              1980     Aug. 29, 1997

<PAGE>


REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)

                                                       Subsequently
                                    Initial Cost        Capitalized
                      Encum-   -------------------------------------------------
  Description         brances      Land        Bldg.        Impr.        Land
--------------------------------------------------------------------------------
36) Highland Hills         $-   $1,210,000  $10,890,000  $2,321,444   $1,198,724
* Carrboro, NC
* Multi-family housing

37) Parkside at Woodlake   $-   $2,932,778  $11,731,108  $  455,523   $2,884,355
* Durham, NC
* Multi-family housing

38) Greenbrier             $-   $  998,957  $10,100,568  $1,392,309   $1,009,698
* Fredericksburg, VA
* Multi-family housing

39) Deerfield              $-   $  427,000  $10,248,000  $  543,179   $  430,416
* Durham, NC
* Multi-family housing

40) The Arbors at Windsor  $-   $  978,750  $ 9,896,250  $  644,973   $  994,426
Lake
* Columbia, SC
* Multi-family housing

41) Westchase              $-   $1,980,000  $ 9,020,000  $1,811,352   $2,012,327
* Charleston, SC
* Multi-family housing

42) Paces Arbor            $-   $1,173,526  $ 4,414,693  $  382,096   $1,181,172
* Raleigh, NC
* Multi-family housing

43) Paces Forest           $-   $1,359,431  $ 5,114,050  $  485,146   $1,370,590
* Raleigh, NC
* Multi-family housing

44) Carlyle Club           $-   $3,589,800  $ 7,990,200  $1,274,800   $3,607,026
* Lawrenceville, GA
* Multi-family housing

45) Ashley Run             $-   $3,780,000  $14,220,000  $1,482,278   $3,793,621
* Norcross, GA
* Multi-family housing

46) Charleston Place       $-   $1,516,000  $ 7,959,000  $  735,482   $1,534,603
* Charlotte, NC
* Multi-family housing

47) Dunwoody Springs       $-   $3,648,000  $11,552,000  $3,024,312   $3,666,146
* Dunwoody, GA
* Multi-family housing


<PAGE>


     Gross Amount Carried
-----------------------------                  Date of      Date
   Bldg. & Impr.     Total        Acc. Dep.    Const.     Acquired    Dep. Life
--------------------------------------------------------------------------------
 $13,222,720      $14,421,444   $1,238,766      1987   Sept. 27, 1996  27.5 yrs.



 $12,235,054      $15,119,409   $1,106,811      1996    Aug. 31, 1996  27.5 yrs.



 $11,482,137      $12,491,834   $1,532,856      1980    Oct. 1, 1996   27.5 yrs.



 $10,787,763      $11,218,179   $  878,888      1985    Nov. 1, 1996   27.5 yrs.



 $10,525,547      $11,519,973   $  810,376      1991    Jan. 1, 1997   27.5 yrs.




 $10,799,026      $12,811,352   $  837,847      1985    Jan. 15, 1997  27.5 yrs.



 $ 4,789,142      $ 5,970,315   $  335,625      1986    March 1, 1997  27.5 yrs.



 $ 5,588,037      $ 6,958,627   $  393,683      1986    March 1, 1997  27.5 yrs.



 $ 9,247,774      $12,854,800   $  641,638     1974     Apr. 30, 1997  27.5 yrs.



 $15,688,657      $19,482,278   $1,046,144      1987    Apr. 30, 1997  27.5 yrs.



 $ 8,675,879      $10,210,482   $  559,521      1986    May 13, 1997   27.5 yrs.



 $14,558,166      $18,224,312   $  827,490      1981    July 25, 1997  27.5 yrs.


<PAGE>


REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)

                                                          Subsequently
                                       Initial Cost        Capitalized
                        Encum-   -----------------------------------------------
  Description           brances    Land           Bldg.         Impr.   Land
--------------------------------------------------------------------------------
48) Clarion Crossing    $-   $ 3,180,000  $  7,420,000  $   476,591  $ 3,235,960
* Raleigh, NC
* Multi-family housing

49) Stone Brook         $-   $ 1,570,000  $  6,280,000  $   861,137  $ 1,582,468
* Norcross, GA
* Multi-family housing

50) St. Regis           $-   $ 2,156,000  $  7,644,000  $   335,730  $ 2,170,353
* Raleigh, NC
* Multi-family housing

51) Remington Place     $-   $ 1,422,000  $  6,478,000  $   557,508  $ 1,433,609
* Raleigh, NC
* Multi-family housing

52) Stone Point         $-   $ 1,164,000  $  8,536,000  $   476,529  $ 1,170,756
* Charlotte, NC
* Multi-family housing

53) Pinnacle Ridge      $-   $ 1,547,411  $  4,183,740  $   316,863  $ 1,572,517
* Ashville, NC
* Multi-family housing

54) Hampton Point       $-   $ 1,589,250  $ 10,635,750  $ 2,048,203  $ 1,648,342
* Charleston, NC
* Multi-family housing

55) The Timbers         $-   $ 1,944,000  $  6,156,000  $   252,596  $ 1,955,632
* Raleigh, NC
* Multi-family housing

56) The Gables          $-   $ 2,185,000  $  9,315,000  $   304,432  $ 2,200,603
* Richmond, VA
* Multi-family housing

57) Spring Lake         $-   $   900,000  $  8,100,000  $   363,025  $   907,555
* Morrow, GA
* Multi-family housing

58) Cape Landing        $-   $ 1,026,000  $ 16,074,000  $   165,961  $ 1,015,486
* Myrtle Beach, SC
* Multi-family housing
                        --------------------------------------------------------
                        $-   $85,028,615  $412,492,050  $89,917,693  $87,013,965
                        ========================================================

<PAGE>


     Gross Amount Carried
-----------------------------                  Date of      Date
   Bldg. & Impr.      Total          Acc. Dep.    Const.    Acquired   Dep. Life
--------------------------------------------------------------------------------
$  7,840,631   $ 11,076,591     $   392,229    1972     Sept. 30, 1997 27.5 yrs.



$  7,128,669   $  8,711,137     $   328,088    1986     Oct. 31, 1997  27.5 yrs.



$  7,965,377   $ 10,135,730     $   348,402    1986     Oct. 31, 1997  27.5 yrs.



$  7,023,899   $  8,457,508     $   299,125    1985     Oct. 31, 1997  27.5 yrs.



$  9,005,773   $ 10,176,529     $   345,740    1986     Jan.15, 1998   27.5 yrs.



$  4,475,496   $  6,048,013     $   142,257    1951     April 1, 1998  27.5 yrs.



$ 12,624,861   $ 14,273,203     $   385,775    1986     Mar 31, 1998   27.5 yrs.



$  6,396,963   $  8,352,596     $   139,998    1983     June 4, 1998   27.5 yrs.



$  9,603,829   $ 11,804,432     $   180,293    1987     July 2, 1998   27.5 yrs.



$  8,455,469   $  9,363,025     $   128,844    1986     Aug. 12, 1998  27.5 yrs.



$ 16,250,475   $ 17,265,961     $   152,653    1997/98  Oct. 16, 1998  27.5 yrs.
-------------------------------------------

$500,424,393   $587,438,358(1)  $48,227,760
===========================================

(1) Represents the aggregate cost for Federal Income tax purposes.

(2) The  reconciliations  of the  carrying  amount  of  real  estate  owned  and
    accumulated  depreciation  is contained  in Note 2 of the audited  financial
    statements.


<PAGE>




                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the  undersigned,  thereunto duly  authorized,  this 29th day of March
1999.

                      CORNERSTONE REALTY INCOME TRUST, INC.

                                      By: /s/ Glade M. Knight
                                         -------------------------
                                         Glade M. Knight,
                                         Chairman of the Board,
                                         Chief Executive Officer
                                         and President

     Pursuant to the  requirements  of the  Securities  Exchange Act 1934,  this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                                          Capacity                               Date
---------                                          --------                               ----
<S>                                              <C>                                   <C>
/s/ Glade M. Knight                              Director, Chief Executive Officer      March 29, 1999
--------------------------------                 and President
Glade M. Knight

/s/ Stanley J. Olander, Jr.                      Director, Chief Financial Officer      March 29, 1999
--------------------------------                 and Principal Accounting Officer
Stanley J. Olander, Jr.

/s/ Harry S. Taubenfeld                          Director                               March 29, 1999
--------------------------------
Harry S. Taubenfeld

/s/ Leslie A. Grandis                            Director                               March 29, 1999
--------------------------------
Leslie A. Grandis

/s/ Glenn W. Bunting, Jr.                        Director                               March 29, 1999
--------------------------------
Glenn W. Bunting, Jr.

/s/ Penelope W. Kyle                             Director                               March 29, 1999
--------------------------------
Penelope W. Kyle

</TABLE>



<PAGE>



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C>
3.1                Amended and Restated Articles of Incorporation of Cornerstone
                   Realty  Income  Trust,  Inc.,  as amended.  (Incorporated  by
                   reference to Exhibit 3.1 included in the Company's  Report on
                   Form 8-K dated May 12, 1998; File No. 1-12875.)

3.2                Bylaws of  Cornerstone  Realty  Income Trust,  Inc.  (Amended
                   Through May 12, 1998)  (Incorporated  by reference to Exhibit
                   3.2  included in the  Company's  Report on Form 8-K dated May
                   12, 1998; File No. 1-12875).

4.1                Credit  Agreement  dated as of October 30, 1997, by and among
                   Cornerstone  Realty Income Trust,  Inc.,  and any  Additional
                   Borrowers party thereto,  as Borrowers,  the Lenders referred
                   to  therein,   and  First  Union   National  Bank,  as  Agent
                   (Incorporated  by  reference  to Exhibit 4.1  included in the
                   Registrant's Report on Form 8-K dated December 30, 1997; File
                   No. 0-23954).

4.2                Joinder Agreement dated as of December 31, 1997 to the Credit
                   Agreement  dated  as  of  October  30,  1997,  by  and  Among
                   Cornerstone   Realty  Income  Trust,  Inc.,  each  Additional
                   Borrower  party  thereto,  CRIT-NC,  LLC,  the lenders  party
                   thereto,   and   First   Union   National   Bank,   as  Agent
                   (Incorporated  by  reference  to Exhibit 4.2  included in the
                   Registrant's Report on Form 8-K dated December 30, 1997; File
                   No. 0-23954).

4.3                (1) Amended and Restated Revolving Credit Note dated December
                   31, 1997 in the principal  amount of up to  $65,000,000  made
                   payable by Cornerstone Realty Income Trust, Inc. and CRIT-NC,
                   LLC to the  order  of  First  Union  National  Bank,  and (2)
                   Amended and Restated Revolving Credit Note dated December 31,
                   1997  in  the  principal  amount  of up to  $35,000,000  made
                   payable by Cornerstone Realty Income Trust, Inc. and CRIT-NC,
                   LLC to the  order  of  AmSouth  Bank,  and  (3)  Amended  and
                   Restated Revolving Credit Note dated December 31, 1997 in the
                   principal  amount  of  up  to  $25,000,000  made  payable  by
                   Cornerstone Realty Income Trust, Inc. and CRIT-NC, LLC to the
                   order of Crestar Bank, and (4) Amended and Restated Revolving
                   Credit Note dated  December 31, 1997 in the principal  amount
                   of up to  $20,000,000  made  payable  by  Cornerstone  Realty
                   Income  Trust,  Inc. and  CRIT-NC,  LLC to the order of Fleet
                   National Bank, and (5) Amended and Restated  Revolving Credit
                   Note dated December 31, 1997 in the principal amount of up to
                   $30,000,000 made payable by Cornerstone  Realty Income Trust,
                   Inc. and CRIT-NC,  LLC to the order of Guaranty Federal Bank,
                   F.S.B.  (Incorporated by reference to Exhibit 4.3 included in
                   the Registrant's  Report on Form 8-K dated December 30, 1997;
                   File No. 0-23954).

</TABLE>



<PAGE>




     The  Company  agrees to  furnish  the  Commission  on request a copy of any
instrument with respect to long-term debt of the Company or its subsidiaries the
total  amount of  securities  authorized  under which does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.

<TABLE>
<CAPTION>


Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C>
10.1               Amendment and Restatement of Cornerstone Realty Income Trust,
                   Inc.  1992  Incentive  Plan.  (Exhibit  10.14)(1)  This  is a
                   management  contract  or  compensatory  plan  or  arrangement
                   required to be filed as an exhibit  pursuant to Item 14(c) of
                   Form 10-K.

10.2               Amendment and Restatement of Cornerstone Realty Income Trust,
                   Inc. 1992 Non-Employee  Directors Stock Option Plan. (Exhibit
                   10.15)(1) This is a management  contract or compensatory plan
                   or arrangement required to be filed as an exhibit pursuant to
                   Item 14 (c) of Form 10-K.

10.3               Agreement  for  Appointment  of Transfer  Agent and Registrar
                   between the Company  and First Union  National  Bank of North
                   Carolina.  (Incorporated herein by reference to Exhibit 10.19
                   to the  Company's  Report  on Form  10-K for the  Year  Ended
                   December 31, 1994; File No. 0-23954).

10.4               Agreement and Bill of Transfer and  Assignment  dated October
                   1,  1996  between  Cornerstone  Management  Group,  Inc.  and
                   Cornerstone Realty Income Trust, Inc.(2)

10.5               Agreement and Bill of Transfer and  Assignment  dated October
                   1, 1996 between  Cornerstone  Advisors,  Inc. and Cornerstone
                   Realty Income Trust, Inc.(2)

10.6               Agreement and Bill of Transfer and  Assignment  dated October
                   1,  1996  between   Cornerstone   Realty   Group,   Inc.  and
                   Cornerstone       Realty       Income       Trust,       Inc.
                   (Acquisition/Disposition Agreement).(2)

10.7               Agreement and Bill of Transfer and  Assignment  dated October
                   1,  1996  between   Cornerstone   Realty   Group,   Inc.  and
                   Cornerstone  Realty Income Trust, Inc.  (Personal  Property).
                   (2)

10.8               Employment   Agreement   dated   September  1,  1996  between
                   Cornerstone  Realty Income  Trust,  Inc. and Glade M. Knight.
                   This  is  a  management  contract  or  compensatory  plan  or
                   arrangement  required  to be filed as an exhibit  pursuant to
                   Item 14 (c) of  Form  10-K.  (Incorporated  by  reference  to
                   Exhibit  10.8 to the  Company's  Report  on Form 10-K for the
                   Year Ended December 31, 1997; File No. 1-12875.)

10.9               Employment   Agreement   dated   September  1,  1996  between
                   Cornerstone  Realty  Income  Trust,  Inc. and Debra A. Jones.
                   This  is  a  management  contract  or  compensatory  plan  or
                   arrangement  required  to be filed as an exhibit  pursuant to
                   Item 14 (c) of Form 10-K. (2)

</TABLE>


                                       



<TABLE>
<CAPTION>

Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C>                                                               <C>
10.10              Employment   Agreement   dated   September  1,  1996  between
                   Cornerstone Realty Income Trust, Inc. and Stanley J. Olander,
                   Jr . This is a management  contract or  compensatory  plan or
                   arrangement  required  to be filed as an exhibit  pursuant to
                   Item 14 (c) of Form 10-K. (2)

10.11              Advisory  Agreement between Apple  Residential  Income Trust,
                   Inc.  and  Apple  Residential  Advisors,  Inc.  (Incorporated
                   herein by reference  to Exhibit  10.1 of  Amendment  No. 2 to
                   Form S-11 of Apple  Residential  Income Trust, Inc. (File No.
                   333-10635) filed on November 14, 1996).

10.12              Form  of  Property   Management   Agreement   between   Apple
                   Residential   Income  Trust,   Inc.  and  Apple   Residential
                   Management Group, Inc.  (Incorporated  herein by reference to
                   Exhibit 10.2 of Form S-11 of Apple Residential  Income Trust,
                   Inc. (File No. 333-10635) filed on August 22, 1996).

10.13              Property  Acquisition/Disposition   Agreement  between  Apple
                   Residential  Income Trust,  Inc. and Apple Realty Group, Inc.
                   (Incorporated  herein by  reference  to Exhibit  10.3 of Form
                   S-11 of  Apple  Residential  Income  Trust,  Inc.  (File  No.
                   333-10635) filed on November 14, 1996).

10.14              Advisory Agreement Subcontract among Apple Residential Income
                   Trust, Inc., Apple Residential Advisors, Inc. and Cornerstone
                   Realty Income Trust, Inc.  (Incorporated  herein by reference
                   to Exhibit 10.14 to the Company's Report on Form 10-K for the
                   Year Ended December 31, 1997; File No. 1-12875.)

10.15              Property   Management   Agreement   Subcontract  among  Apple
                   Residential Income Trust, Inc., Apple Residential  Management
                   Group,  Inc.,  and  Cornerstone  Realty  Income  Trust,  Inc.
                   (Incorporated  herein by  reference  to Exhibit  10.15 to the
                   Company's Report on Form 10-K for the Year Ended December 31,
                   1997; File No. 1-12875.)

10.16              Agreement  and Bill of Transfer  and  Assignment  among Apple
                   Residential  Income Trust, Inc., Apple Realty Group, Inc. and
                   Cornerstone Realty Income Trust, Inc. (Incorporated herein by
                   reference to Exhibit  10.16 to the  Company's  Report on Form
                   10-K for the Year Ended December 31, 1997; File No. 1-12875.)

10.17              Right of First Refusal  Agreement  between Apple  Residential
                   Income Trust, Inc. and Cornerstone  Realty Income Trust, Inc.
                   (Incorporated   herein  by   reference  to  Exhibit  10.7  of
                   Amendment  No.  2 to Form  S-11 of Apple  Residential  Income
                   Trust, Inc. (File No. 333-10635) filed on November 14, 1996.)

10.18              Common  Share  Purchase   Option   Agreement   between  Apple
                   Residential  Income Trust, Inc. and Cornerstone Realty Income
                   Trust,  Inc.  (Incorporated  herein by  reference  to Exhibit
                   10.18 to the Company's Report on Form 10-K for the Year Ended
                   December 31, 1997; File No. 1-12875.)

10.19              Assignment Relating to Property  Management  Agreements among
                   Apple  Residential  Income  Trust,  Inc.,  Apple  Residential
                   Management  Group,  Inc., Apple REIT Limited  Partnership and
                   Cornerstone Realty Income Trust, Inc. (Incorporated herein by

</TABLE>

                                       

<PAGE>

<TABLE>
<CAPTION>


Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C>
                   reference to Exhibit  10.19 to the  Company's  Report on Form
                   10-K for the Year Ended December 31, 1997; File No. 1-12875.)

10.20              [Intentionally Omitted.]

10.21              Articles of Organization of CRIT-NC,  LLC.  (Incorporated  by
                   reference to Exhibit 10.1 included in the  Company's  Current
                   Report  on  Form  8-K  dated  December  30,  1997;  File  No.
                   0-23954.)

10.22              Operating  Agreement of CRIT-NC,  LLC dated as of December 9,
                   1997.  (Incorporated by reference to Exhibit 10.2 included in
                   the Company's  Current  Report on Form 8-K dated December 30,
                   1997; File No. 0-23954.)

10.23              Form of  Property  Management  Agreement  between  Apple REIT
                   Limited  Partnership and Apple Residential Income Trust, Inc.
                   (Incorporated  herein by  reference  to Exhibit  10.23 to the
                   Company's Report on Form 10-K for the Year Ended December 31,
                   1997; File No. 1-12875.)

10.24              First Amendment to the Cornerstone  Realty Income Trust, Inc.
                   1992  Incentive  Plan.  This  is  a  management  contract  or
                   compensatory  plan or arrangement  required to be filed as an
                   exhibit  pursuant to Item 14 (c) of Form 10-K.  (Incorporated
                   herein by reference to Exhibit 10.24 to the Company's  Report
                   on Form 10-K for the Year Ended  December 31, 1997;  File No.
                   1-12875.)

10.25              First Amendment to the 1992 Incentive Plan Nonstatutory Stock
                   Option  Agreement  between  Cornerstone  Realty Income Trust,
                   Inc. and Martin Zuckerbrod.  This is a management contract or
                   compensatory  plan or arrangement  required to be filed as an
                   exhibit  pursuant to Item 14 (c) of Form 10-K.  (Incorporated
                   herein by reference to Exhibit 10.25 to the Company's  Report
                   on Form 10-K for the Year Ended  December 31, 1997;  File No.
                   1-12875.)

10.26              First Amendment to the 1992 Incentive Plan Nonstatutory Stock
                   Option  Agreement  between  Cornerstone  Realty Income Trust,
                   Inc. and Harry S. Taubenfeld.  This is a management  contract
                   or compensatory  plan or arrangement  required to be filed as
                   an   exhibit   pursuant   to  Item  14  (c)  of  Form   10-K.
                   (Incorporated  herein by  reference  to Exhibit  10.26 to the
                   Company's Report on Form 10-K for the Year Ended December 31,
                   1997; File No. 1-12875.)

10.27              First Amendment to the Cornerstone  Realty Income Trust, Inc.
                   1992  Non-Employee  Directors  Stock Option  Plan.  This is a
                   management  contract  or  compensatory  plan  or  arrangement
                   required to be filed as an exhibit  pursuant to Item 14(c) of
                   Form  10-K.   (Incorporated  by  reference  to  Exhibit  10.1
                   included in the  Company's  Current  Report on Form 8-K dated
                   May 12, 1998; File No. 1-12875.)

10.28              Agreement of Limited Partnership of Cornerstone  Partners, L.
                   P. (Incorporated by reference to Exhibit 10.2 included in the
                   Company's  Current Report on Form 8-K dated October 16, 1998;
                   File No. 1-12875.)

10.29              Credit Agreement among Cornerstone Realty Income Trust, Inc.,
                   CRIT- NC, LLC and First Union National Bank. (Incorporated by
                   reference to Exhibit 10.3 included in the  Company's  Current
                   Report on Form 8-K dated October 16, 1998; File No. 1-12875.)

</TABLE>


                                       
<PAGE>

<TABLE>
<CAPTION>

Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C> 
10.30              Revolving  Credit  Note  made by  Cornerstone  Realty  Income
                   Trust, Inc. and CRIT-NC,  LLC.  (Incorporated by reference to
                   Exhibit 10.4 included in the Company's Current Report on Form
                   8-K dated October 16, 1998; File No. 1-12875.)

10.31              Termination of Advisory Agreement Subcontract.  (Incorporated
                   by  reference  to  Exhibit  10.5  included  in the  Company's
                   Current  Report on Form 8-K dated October 16, 1998;  File No.
                   1-12875.)

10.32              Termination  of Property  Management  Agreement  Subcontract.
                   (Incorporated  by reference  to Exhibit 10.6  included in the
                   Company's  Current Report on Form 8-K dated October 16, 1998;
                   File No. 1-12875.)

10.33              Bill   of   Sale   and   Note    Pertaining    to    Property
                   Acquisition/Disposition Agreement. (Incorporated by reference
                   to Exhibit 10.7 included in the Company's  Current  Report on
                   Form 8-K dated October 16, 1998; File No. 1-12875.)

10.34              Assignment and Assumption  Agreement  (Pertaining to Advisory
                   Agreement  for  Apple   Residential   Income  Trust,   Inc.).
                   (Incorporated  by reference  to Exhibit 10.8  included in the
                   Company's  Current Report on Form 8-K dated October 16, 1998;
                   File No. 1-12875.)

10.35              Amended   and   Restated   Property   Acquisition/Disposition
                   Agreement.   (Incorporated   by  reference  to  Exhibit  10.9
                   included in the  Company's  Current  Report on Form 8-K dated
                   October 16, 1998; File No. 1-12875.)

21                 Subsidiaries of Cornerstone  Realty Income Trust,  Inc. FILED
                   HEREWITH.

23                 Consent of Independent Auditors. FILED HEREWITH.

27                 Financial Data Schedule. FILED HEREWITH.

99.1               Pages 3  through  7 of the  Current  Report  on  Form  8-K of
                   Cornerstone Realty Income Trust, Inc. dated January 15, 1998.
                   FILED HEREWITH.

99.2               Pages 4  through  11 of the  Current  Report  on Form  8-K of
                   Cornerstone  Realty Income Trust,  Inc. dated March 31, 1998.
                   FILED HEREWITH.

99.3               Pages 3  through  6 of the  Current  Report  on  Form  8-K of
                   Cornerstone  Realty Income Trust,  Inc.  dated June 4 , 1998.
                   FILED HEREWITH.

99.4               Pages 3  through  6 of the  Current  Report  on  Form  8-K of
                   Cornerstone  Realty  Income Trust,  Inc.  dated July 2, 1998.
                   FILED HEREWITH.

99.5               Pages 4  through  8 of the  Current  Report  on  Form  8-K of
                   Cornerstone  Realty Income Trust, Inc. dated August 12, 1998.
                   FILED HEREWITH.

</TABLE>


                                  
<PAGE>

<TABLE>
<CAPTION>


Exhibit Number     Description                                                 
--------------     -----------                                                 
<S>                <C>
99.6               Pages 4  through  8 of the  Current  Report  on  Form  8-K of
                   Cornerstone Realty Income Trust, Inc. dated October 16, 1998.
                   FILED HEREWITH.



(1)          Incorporated  herein by  reference  to the  Exhibit  referred to in
             parentheses  which  was  filed  as  an  Exhibit  to  the  Company's
             Post-Effective  Amendment  No. 5 to its  Registration  Statement on
             Form S-11 (File No.  33-51296),  as filed with the  Securities  and
             Exchange Commission on April 28, 1994.

(2)          Incorporated  herein by reference to the Exhibit of the same number
             filed as an  Exhibit  to the  Company's  Report  on Form 8-K  dated
             September 26, 1996 (File No. 0-23954).


</TABLE>